Why is financial flexibility important in the choice of a capital structure?

Question:

Why is financial flexibility important in the choice of a capital structure?

Financial flexibility:

Any organization's capability to gather the financial resources for taking advantage of investment opportunities in the market is known as financial flexibility. It leads to assess the possibilities and increase the value of the organization.

Answer and Explanation:

Financial flexibility is essential in choosing the capital structure in the following ways:

1. It provides the ability to react, adapt, and change the capital structure according to the changes in the market and organization.

2. Financial flexibility helps organizations to manage levels of leverage and proportionately balance the level of capital structure.

3. It enables an organization to reconstruct the capital structure at a low cost as and when required.

4. Through payout channels, financial flexibility enables management to repurchase the stocks and return the extra cash to investors.


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Capital Structure & the Cost of Capital

from Finance 101: Principles of Finance

Chapter 15 / Lesson 1
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