Identify and state any three factors affecting the decision which involves determining the relative proportion of the use of different sources in…

Capital Structure Factors affecting choice of Capital Structure : 1. Cash flow position must be considered to meet fixed payment obligations associated with debt. 2. The higher the Interest Coverage Ratio (ICR), lower shall be the risk of company failing to meet its interest payment obligations. 3. A higher Debt Service Coverage Ratio (DSCR) indicates the company’s potential to increase debt component in its capital structure. 4. If the Return on Investment(RoI) of the company is higher than the interest on debt,its ability to use debt is greater. 5. A firm’s ability to borrow (cost of debt) at a lower rate increases its capacity to employ higher debt. 6. A higher tax rate makes debt relatively cheaper and increases its attraction vis-à-vis equity. 7. Cost of Equity increases when debt is used beyond a certain point. 8. Floatation cost of raising various resources may also affect the choice between debt and equity. 9. If a firm’s business risk is lower, its capacity to use debt is higher and vice versa. 10. If a firm uses its debt potential to the full, it loses flexibility to issue further debt. 11. Debt normally does not cause a dilution of control while a public issue of equity may reduce the managements’ holding in the company. 12. Every company operates within a regulatory framework provided by the law, so the relative ease with which the norms can be met may have a bearing upon the choice of the source of finance. 13. If the stock markets are bullish, equity shares are more easily sold whereas during a bearish phase, a company may opt for debt. 14. A useful guideline in the capital structure planning is the capital structure of other companies in the same industry.