Define the meaning of each letter of FRICTO, and give an illustration of each

Expert Solution

Ans. FRICTO- Flexibility , Risk, Control, Timing , Other

Fricto: Factor is analysing long term Capital Structure

1. Flexibility : Flexibility means company ability for access in the financial market . It means company able to raise fund, company have the acess in financial market. can also take financing type of its liking .

2. Risk: The alternative choices on the risk the company and its stakeholder are exposed, for taking for debt its is risk of both creditor and shareholder.

3. Income: A company EBIT is above its financing indifference point will be able to increase its earning per share by taking additional debt.

4. Control: Amount of control over the company by each shareholder , in general issuing addional share for reducing the control over the company.

5. Timing: From time to time financial market shifted from one preferred market to another market thereby affecting company debt and equity mix choices.

6. Other: The impact of Alternative financing choices on other issue or the impact on such issue on these choices , for example the potential reduction in the cost and risk of debt financing that would be brought about by positng collateral.

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