What Are The Factors Affecting The Capital Structure?

What are the external factors affecting capital structure?

External Factors influencing Capital Structure?Market Condition: -The pattern of capital is also influenced by prevailing market conditions.

Attitude of Investor: -Attitude of investor also plays an important role in determination of capital structure.

Cost of Capital: -Cost of capital is one of the important factors while designing capital structure.More items….

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 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.

Which one is not the internal factor that can affect the capital structure?

The market risk premium is the difference between the expected return on a market portfolio and the risk-free rate. It does not form a part of internal factors affecting the WACC of a firm.

What is meant by capital structure?

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 are the sources of capital structure?

1 Subsequent theoretical work has taken into account the imperfections of financial markets and has shown that firm capital structure emerges from three sources: firm-specific, country of incorporation institutional, and macroeconomic factors.

What are the components of capital?

Capital Structure refers to the proportion of money that is invested in a business. It has four components and it includes Equity Capital, Reserves and Surplus, Net Worth, Total Borrowings. It represents the risk capital staked by the owners through purchase of Owners Company’s common stock.

What is an example of a capital structure decision?

If Company XYZ has completed an initial public offering and a bond offering, we could therefore say that Company XYZ’s capital structure includes debt and equity. Bank loans, preferred stock, retained earnings and working capital might also be part of the company’s capital structure.

Which of the following factors does not influence the capital structure?

Composition of the current assets does not affect the capital structure of a company. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.

What are the types of capital budgeting decisions?

A firm may adopt three types of capital budgeting decisions:(i) Mutually Exclusive Projects:(ii) Accept-Reject Decisions or Acceptance Rule:(iii) Capital Rationing Decision:(a) Type of Industry:(b) General Economic Conditions:(c) Degree of Faith the Executives have in Long-range Planning:

What is capital structure and factors affecting capital structure?

Some of the factors affecting the capital structure of a company are as follows: Capital structure means the proportion of debt and equity used for financing the operations of business. Capital structure = Debt / Equity.

What are the internal factors affecting capital structure?

Factors Affecting Capital Structure Decisions: Internal and External FactorsFinancial Leverage: … Risk: … Growth and Stability: … Retaining Control: … Cost of Capital: … Cash Flows: … Flexibility: … Purpose of Finance:More items…

What are the five steps in the capital budgeting process?

The capital budgeting process consists of five steps:Identify and evaluate potential opportunities. The process begins by exploring available opportunities. … Estimate operating and implementation costs. … Estimate cash flow or benefit. … Assess risk. … Implement.

What is capital structure decision?

A company’s capital structure is arguably one of its most important choices. From a technical perspective, the capital structure is defined as the careful balance between equity and debt that a business uses to finance its assets, day-to-day operations, and future growth.

What are the factors affecting capital budgeting decisions?

Factors influencing capital expenditure decisionsAvailability of Funds. All the projects are not requiring the same level of investments. … Minimum Rate of Return on Investment. … Future Earnings. … Quantum of Profit Expected. … Cash Inflows. … Legal Compulsions. … Ranking of the Capital Investment Proposal. … Degree of Risk and Uncertainty.More items…

What is capital budgeting explain its process and techniques?

Capital budgeting is a company’s formal process used for evaluating potential expenditures or investments that are significant in amount. It involves the decision to invest the current funds for addition, disposition, modification or replacement of fixed assets.

What are the capital structure theories?

Capital Structure and its Theories. Capital Structure means a combination of all long-term sources of finance. … Based on the proportion of finance, WACC and Value of a firm are affected. There are four capital structure theories for this, viz. net income, net operating income, traditional and M&M approach.