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Define capital structure two factor affectIng …

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Define capital structure two factor affectIng capital structure of a company

Posted by Mohit Chauhan 4 years, 9 months ago

CBSE > Class 12 > Business Studies

1 answers

Yogita Ingle 4 years, 9 months ago

Capital structure refers to mix sources of long-term finance. Sources of finance include
Share Capital Borrowed fund and Retained earnings. The appropriate proportion of funds is made in such a manner that it can give more benefit or return to the shareholders.
Some of the chief factors affecting the choice of the capital structure are the following:
Cash Flow Position: While making a choice of the capital structure, the future cash flow position should be kept in mind. Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital.
Interest Coverage Ratio ICR: With the help of this ratio, an effort is made to find out how many times is the Earning Before Interest and Tax (EBIT) available to the payment of interest. The capacity of the company to use debt capital will be in direct proportion to this ratio. This ratio can be found out with the help of the following formula:

ICR = EBIT/Interest

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