FACTORS THAT INFLUENCE A COMPANY’S CAPITAL-STRUCTURE DECISION:
Why do firms need to raise capital?
Corporations often need to raise external funding, or capital, in order to expand their businesses into new markets or locations, to invest in research & development, or to fend off the competition.
What important factors in addition to quantitative factors should a firm consider when it making a capital structure decision?
In addition to a consideration of tax effects, financial distress costs, agency costs, the business risk facing the firm, EBIT-EPS analysis, and cash insolvency analysis, there are additional factors normally considered as a firm makes its capital structure decisions.
What are the primary factors that should be considered when establishing a firm’s capital structure?
of a firm. Tangibility of assets, growth opportunities, size, uniqueness, business risk, and profitability are some of the major factors which determine the capital structure.
What are factors affecting capital structure?
Factors Affecting Capital Structure – Profitability, Cost of Capital, Nature of Business of Firm, Cash Flows, Control of Firm, Capital Market Conditions and a Few Others.
How do you increase debt capital?
In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid. The other way to raise capital in debt markets is to issue shares of stock in a public offering; this is called equity financing.
What are the factors that affect a capital structure?
There are different factors that affect a firm’s capital structure, and a firm should attempt to determine what its optimal, or best, mix of financing. The following factors must be kept in mind while taking capital structure decisions are:- 1. Size of Business 2. Form of Business Organisations 3. Stability of Earnings 4.
What are external factors that affect working capital?
External Factors That Affect Working Capital Banking Services: The inability to raise capital from banks can afflict the working capital of an organization. Interest Rates: When interest rates are high, it becomes expensive to borrow funds.
What should be considered in a capital structure decision?
In capital structure decisions, two elements of risk viz., (ii) Financial risk are considered. A firm with high business risk prefer to have low levels of debt, since the volatility of its earnings is more.
Which is a key division in capital structure?
The key division in capital structure is between debt and equity. The proportion of debt funding is measured by gearing or leverages. There are different factors that affect a firm’s capital structure, and a firm should attempt to determine what its optimal or best mix of financing.
