List the factors influencing pattern on capital structure.

The factors influencing pattern on capital structure are as follows −

  1. Economy
  2. Industry
  3. Company
  • Economy
    • Measure of economy: Equity is preferred.

    • Capital market: Funds availability depends on the market conditions.

    • Taxation: Varies with different tax structures.

    • Policy of financial institutions: Choosing of debt may change with change in policy.

  • Industry
    • Frequent variations: Frequent variations in activities may lead to bankruptcy over the years.

    • Competition: Risk factor has to be kept in mind to get profits between competitors.

    • Phase in industry cycle: Source of funds changes with change in phase in industry cycle.

  • Company
    • Type of company (small, medium, large): Availability of funds depend on type of company.

    • Structure of organization: Flexibility between equity and debt depends on organization structure.

    • Earnings (regular and irregular): Risk factor is involved in earnings, regular income leads to low risk (debt) and low returns leads to high risk (equity).

    • Company asset: Whether to buy cheap debt or common stock has to be decided based on life on an asset. If the asset life is long, then company will go for cheap debt and if asset life is small, company will go for common stock.

    • Lifetime of company (young, mature): To have a good capital market, company must be mature and use their leverage effectively.

    • Credit status: Source of funds depend on credit status. Company having less credit status means their funds are limited and company having good credit status means, they can adjust with their choices.

    • Management decisions: Decisions regarding risk and control has to be taken accordingly.

Updated on: 26-Sep-2020


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