Question

What important factors, in addition to quantitative factors, should a firm consider when it is making a capital structure decision? How do these factors play in the decision? Be sure to support your ideas with examples from your own experience or other firms or sources.

Answer 1

Firm should be considering in various kinds of qualitative and quantitative factors while making capital structure decisions.

since the question is asking for only mentioning up with quantitative aspect of capital structure, my observations would be as follows-

A. Debt capital will generally be having a interest rate tax shield and those interest rate tax shield should be fairly calculated.

B.debt financing also has a cost of financial distress so interest tax benefits should be balanced with cost of financial distress.

C.when the company is able to make a high rate of return on its overall capital then the cost of debt with rate of return should be compared and if rate of return is higher it will be leading to growth and less cost of equity as well

D When companies not able to make a high rate of return, it should be taking less of the debt capital because it will lead to cost of financial distress.

so it can be said that the balance should equally be made between various kinds of financing in order to maximize the overall rate of return and risk exposures needs to be adequately discounted into the overall functioning of the company.