What is capital structure? Discuss various factors that determine the capital structure of a
company.
Answers
Answer:
The mix of debt and equity used to finance the company’s future profitable investment opportunities is referred to as capital structure.
●Size of Company-Small companies may have to rely on the founder’s money but as they grow they will be eligible for long-term financing because larger companies are considered less risky by investors.
●Nature of Business -If your business is a monopoly you can go for debentures because your sales can give you adequate profits to pay your debts easily or pay dividends.
●The Regularity of Earnings-A firm with large and stable incomes may incur more debt in its capital structure, unlike the one that is unstable.
●Conditions of the Money Markets–Capital markets are always changing. You don’t want to issues company shares during a bear market, you do it when there is a bull run.
●Government policy– This is important to consider. A change in lending policy may increase your cost of borrowing.
●Cost of Floating– The cost of floating equity is much higher than that of floating debt. This may influence the finance manager to take debt financing the cheaper option.
●Debt -Equity Ratio– As stated debt is a liability whose interest has to be paid irrespective of earnings. Equity, on the other hand, is shareholders money and payment depend on profits being paid. High debt in the capital structure is risky and may be a problem in adverse times. However, debt is cheaper than issuing shares. Debt interest has some tax deductions that is not the case for dividends paid to equity holders.
Hello !
The capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth. Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock, or retained earnings
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