Question

Capital structure is the manner in which a firm's assets are financed. In a two to three page essay, provide an in-depth analysis of the determinants that affect the capital structure of a company. Be sure to provide real world illustrations from your company or one that you are familiar with to facilitate your analysis.

Answer 1

Capital structure is the combination of different types of finances. It is the mixture of all sources of finances that a firm have. It is generally two broad sources one is equity and other is debt. They are the two main components of the capital structure.

The capital structure depends on following:

1. Tax saving - If the company has tax saving criteria, then they go for debt issue. This will help in taking the advantage of debt as interest expenses is tax deductible. My firm goes for it often.

2. Cost of capital - If the company has this criteria then they issue debt and issung deby will reduce the overall cost of capital.

3. Size of the firm - If it is smaller in size, then often go for bank loan. My firms often takes bank loan.

4. Life-cycle of business - If the firm wants to expand then in this case, equity financing is better. As thete will be less pressure to service the amount and also long term growth can be expected from this financing.

5. Nature of the firm - The needs gets changed as per objective. The profit making company have different capital needs than non-profit making.