Question

1. What are some factors that affect capital structure decisions made by management? What are the arguments in support of using debt as part of the capital structure?

2. Does capital structure influence the value of a firm? Why or why not?

Answer 1

1. Some of the factor that will affect the capital structure decision made by management are as follows-

A. Overall profitability related to the optimum mix of debt and equity capital

B. Cost of capital and the overall return on capital and will be compared with each other in order to find out whether the project is to be undertaken not

C. Capital structure which have been adopted by the company in the past

D. Interest tax deduction is to be compared with the cost of Financial distress.

arguments for support of using debt as a part of capital structure would be that when the company is able to generate an optimum amount of profit that is high enough than the overall cost of debt, then the differential between the return on the the capital and the cost of debt, would be helpful for a company in generation of growth.

So,company should only be using debt capital if the return the capital is higher than the cost of debt because it will help in growth of the company