Question: What Are The Factors Determining Capital Structure?

What factors determine capital structure?

The various factors which influence the decision of capital structure are:Cash Flow Position: …

Interest Coverage Ratio (ICR): …

Debt Service Coverage Ratio (DSCR): …

Return on Investment: …

Cost of Debt: …

Tax Rate: …

Cost of Equity: …

Floatation Costs:More items….

What is capital structure What are the internal and external factors influencing capital structure?

Size and Nature of Business: The size of business has great impact on its capital structure. Trading concerns raise capital by issue of equity as well as preference shares as they require more working capital. Small companies have limited capacity to raise funds from external sources.

What is capital structure planning?

Definition: Capital structure refers to an arrangement of the different components of business funds, i.e. shareholder’s funds and borrowed funds in proper proportion. A business organization utilizes the funds for meeting the everyday expenses and also for budgeting high-end future projects.

What is capital structure in simple words?

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.

What is the difference between capital structure and financial structure?

Financial structure refers to the balance between all of the company’s liabilities and its equities. … Capital structure, by contrast, refers to the balance between equities and long-term liabilities. Short-term liabilities do not contribute to capital structure.

How does capital structure affect value?

A company’s capital structure — essentially, its blend of equity and debt financing — is a significant factor in valuing a business. The relative levels of equity and debt affect risk and cash flow and, therefore, the amount an investor likely would pay for the company or for an interest in it.

What are the factors of capital?

When economists refer to capital, they are referring to the assets–physical tools, plants, and equipment–that allow for increased work productivity. Capital comprises one of the four major factors of production, the others being land, labor, and entrepreneurship.

What are the types of capital structure?

Types of Capital StructureEquity Capital. Equity capital is the money owned by the shareholders or owners. … Debt Capital. Debt capital is referred to as the borrowed money that is utilised in business. … Optimal Capital Structure. … Financial Leverage. … Importance of Capital Structure.

What are the 7 factors of production?

Factors of ProductionLand/Natural Resources.Labor.Capital.Entrepreneurship.

What are the features of an appropriate capital structure?

Some of the major features of sound capital structure are as follows: (i) Maximum Return (ii) Less Risky (iii) Safety (iv) Flexibility (v) Economy (vi) Capacity (vii) Control.

What is the importance of capital structure?

Capital structure maximizes the market value of a firm, i.e. in a firm having a properly designed capital structure the aggregate value of the claims and ownership interests of the shareholders are maximized. Cost Minimization: Capital structure minimizes the firm’s cost of capital or cost of financing.

What is an example of capital structure?

A firm’s capital structure is the composition or ‘structure’ of its liabilities. For example, a firm that has $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. … In reality, capital structure may be highly complex and include dozens of sources of capital.

What is optimal capital structure?

The optimal capital structure of a firm is the best mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital. … Thus, companies have to find the optimal point at which the marginal benefit of debt equals the marginal cost.

What are the two types of capital?

The following are different examples of types of capital:Financial (Economic) Capital. Financial capital is necessary in order to get a business off the ground. … Human Capital. Human capital is a much less tangible concept, but its contribution to a company’s success is no less important. … Social Capital.

What are 2 factors of production?

Factors of Production – The Economic Lowdown Podcast Series, Episode 2. Factors of production are the resources people use to produce goods and services; they are the building blocks of the economy. Economists divide the factors of production into four categories: land, labor, capital, and entrepreneurship.