Question

'A public issue of equity may reduce the management holding in the company and make it vulnerable to takeover. This factor also influences the choice between debt and equity, especially in companies in which the current holding of management is on a lower side.'
The factor affecting the choice of capital structure discussed in the above case is:

• A. Flexibility
• B. Cost of debt
• C. Cost of equity
• D. Control

Hint:

Maintaining control is crucial when making capital structure decisions, especially when management’s equity stake is low and vulnerable to dilution.

Answer 1

The Correct Option is D

The factor affecting capital structure in this case is control. Issuing equity to the public can dilute the ownership of management, making it vulnerable to a takeover. Companies prefer to maintain control, especially when their current stake in the company is low. Hence, control is an important factor in determining the choice between debt and equity financing.