Question

What is capital structure? Describe any three factors determining it.

Hint:

A balanced capital structure is essential for reducing the cost of capital and maintaining financial stability.

Answer 1

Capital structure refers to the mix of debt and equity that a company uses to finance its operations and growth. Step 1: Cost of Capital.
One factor affecting capital structure is the cost of capital. Companies seek to minimize the overall cost by balancing debt and equity financing.
Step 2: Business Risk.
The level of business risk influences capital structure decisions. Riskier businesses may prefer more equity financing to avoid the burden of debt.
Step 3: Flexibility.
Companies also consider their financial flexibility. Firms with greater financial flexibility may take on more debt to take advantage of lower interest rates. Final Answer: Capital structure is the combination of debt and equity financing, and it is influenced by the cost of capital, business risk, and financial flexibility.