Question

Not all firms have the same optimal capital structure. Factors that might influence a firm's capital structure include: a) the industry in which it operates b) the volatility of its sales and operating income c) the collateral value of its assets d) all of the above why?

Answer 1

The answer is (D) all of the above. Capital structure is determined by the industry in which it operates because it influences the cost of setting up a business. For example, a service industry firm would require lesser cost than a manufacturing industry firm. Hence, the service sector firm might want to finance using more of equity while the manufacturing sector firm might want to finance using more of debt.

Volatility of sales also affects the optimal capital structure as it affects the profitability of the company. The capital structure in this case would depend on the overall condition of the firm.

If the collateral value of a firm's asset is high enough, the firm would want to finance itself using more of debt as it is capable of getting higher loan amount and it will be at a cheaper rate as the firm has a solid, good collateral.