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Q. Write An Essay On The Determinants of Capital Structure With A Minimum of 4 References

The document discusses the determinants of capital structure. It outlines several key factors that affect a firm's capital structure decision, including: trading on equity, degree of control, flexibility of financial plans, choice of investors, capital market conditions, period of financing, cost of financing, stability of sales, and size of the company. The capital structure is the combination of debt and equity used by a firm to finance its assets, and management must determine the optimal structure to maximize firm value based on these various determinants.

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40 views2 pages

Q. Write An Essay On The Determinants of Capital Structure With A Minimum of 4 References

The document discusses the determinants of capital structure. It outlines several key factors that affect a firm's capital structure decision, including: trading on equity, degree of control, flexibility of financial plans, choice of investors, capital market conditions, period of financing, cost of financing, stability of sales, and size of the company. The capital structure is the combination of debt and equity used by a firm to finance its assets, and management must determine the optimal structure to maximize firm value based on these various determinants.

Uploaded by

rakesh kumar
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
Download as docx, pdf, or txt
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Q.

Write an essay on the determinants of capital structure with a minimum of


4 references.
 Capital structure is a well-documented phenomenon and can be defined as a combination
of a debt and equity to finance a firm. Capital structure generally focuses on how firms
decide to finance their assets between many sources.
 For instance, Pecking Order theory suggests that firms ought to follow a hierarchy starts
from internal sources to debt and finishes with issuing equity. On the other hand, Trade
off theory explains capital structure as a balance between various pros and cons of debt
and equity.
 The management of a firm is responsible to make vital decisions about setting capital
structure in a way that the firm’s value is maximized.
 all factors that affect capital structure is hypothesized and panel regression model is
applied.

FACTORS DETERMINING CAPITAL STRUCTURE

1. Trading on Equity - The word “equity” denotes the ownership of the company.
Trading on equity means taking advantage of equity share capital to borrowed
funds on reasonable basis. It refers to additional profits that equity shareholders
earn because of issuance of debentures and preference shares.

2. Degree of control - In a company, it is the directors who are so called elected
representatives of equity shareholders. These members have got maximum
voting rights in a concern as compared to the preference shareholders and
debenture holders.

3. Flexibility of financial plan - In an enterprise, the capital structure should be


such that there is both contractions as well as relaxation in plans. Debentures
and loans can be refunded back as the time requires. While equity capital cannot
be refunded at any point which provides rigidity to plans. Therefore, in order to
make the capital structure possible, the company should go for issue of
debentures and other loans.

4. Choice of investors- The company’s policy generally is to have different


categories of investors for securities. Therefore, a capital structure should give
enough choice to all kind of investors to invest. Bold and adventurous investors
generally go for equity shares and loans and debentures are generally raised
keeping into mind conscious investors.

5. Capital market condition- In the lifetime of the company, the market price of the
shares has got an important influence. During the depression period, the
company’s capital structure generally consists of debentures and loans. While in
period of boons and inflation, the company’s capital should consist of share
capital generally equity shares.

6. Period of financing- When company wants to raise finance for short period, it


goes for loans from banks and other institutions; while for long period it goes for
issue of shares and debentures.

7. Cost of financing- In a capital structure, the company has to look to the factor of
cost when securities are raised. It is seen that debentures at the time of profit
earning of company prove to be a cheaper source of finance as compared to
equity shares where equity shareholders demand an extra share in profits.

8. Stability of sales- An established business which has a growing market and


high sales turnover, the company is in position to meet fixed commitments.
Interest on debentures has to be paid regardless of profit. Therefore, when sales
are high, thereby the profits are high and company is in better position to meet
such fixed commitments like interest on debentures and dividends on preference
shares.

9. Sizes of a company- Small size business firms capital structure generally


consists of loans from banks and retained profits. While on the other hand, big
companies having goodwill, stability and an established profit can easily go for
issuance of shares and debentures as well as loans and borrowings from
financial institutions.

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