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Factors affecting choice of capital structure

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Factors affecting choice of capital structure

Posted by Sajid Ansari 6 years, 11 months ago

CBSE > Class 12 > Business Studies

2 answers

Gaurav Seth 6 years, 11 months ago

Factors affecting capital structure :
(i)Cost of debt If the rate of interest on debt is high, the company should use less debt in its capital structure, and vice-versa.
(ii) Cost of equity When a company increases debt, the financial risk faced by equity shareholders increases. Thus, debt can be used upto a limit. Beyond that point, cost of equity may go up and share prices may decrease.
(iii) Interest coverage ratio ICR refers to the no. of times earnings before interest and tax covers the interest obligation. Higher the ICR, the company can borrow more funds and vice-versa.
(iv) Debt service coverage ratio It refers to the ratio that takes care of deficiencies in the ICR. A higher DSCR indicates better ability of the company to meet its cash commitments and borrow more funds.

Digvijay Pandey 6 years, 11 months ago

Cash flow position ,cost of debt and many points is given on page no. 9.18 in Sandeep garg book see from there

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