Factors That Affect Capital Structure
- Availability of securities – This influences the company’s use of debt finance which means that if a company has sufficient securities, it can afford to use debt finance in large capacities.
- Cost of finance (both implicit and explicit) – If low, then a company can use more of debt or equity finance.
- Company gearing level – if high, the company may not be able to use more debt or equity finance because potential investors would not be willing to invest in such a company.
- Sales stability – If a company has stable sales and thus profits, it can afford to use various finances in particular debt in so far as it can service such finances.
- Competitiveness of the industry in which the company operates – If the company operates in a highly competitive industry, it may be risky to use high levels of debt because chances of servicing this debt may be low and may lead a company into receivership.
(Visited 8 times, 1 visits today)