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What important factors in addition to quantitative factors should a firm consider when it is...

Question:

What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision?

Capital Structure

The capital structure of an entity is defined as the fusion of various sources of funds to finance the capital requirement of the business. The entity can meet its fund requirement by obtaining debt, equity, or using the retained earnings.

Answer and Explanation:

Some of the factors considered for capital structure decisions are as follows:

  • The size of a business is one of the important factors in capital structure decisions. The big firms are able to obtain long term borrowings easily, unlike small entities.
  • If the entity is a well-established and has stable earnings, then it can raise funds through debt instruments because it has regular earnings to pay the interest on debt.
  • The management's concerns about the control over the entity also affects the capital structure of an entity. If the entity raises funds by issuing equity, there is more interference in the decision making by the shareholders.
  • Where the funds are easily available in the market, and the cost of raising them is also not very high, then the entity chooses debt as the optimal source for financing the operation of the entity.

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Capital Structure & the Cost of Capital

from Finance 101: Principles of Finance

Chapter 15 / Lesson 1
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