Question

Explain how industry effects need to be considered in the capital structure decision.

Answer 1

industries effects are needed to be considered in capital structure decision because the company will be operating into the industry and industry will always be having a certain need of capital like those industries where there is a high growth oriented industry like E-Commerce industry or electronic car manufacturing industry, there will be a need of debt capital in their overall capital structure because they need to grow and expand their business to a higher market so it should be leading to getting the higher proportion of debt capital in their capital structure.

Hence, when they will be trying to follow the trend of the industry, capital structure and the need of the industry to expand itself then they will be going for debt capital and debt capital will be having a higher cost related to financial distress, so these highly growing company will be trying to maximize their rate of return in order to pair with the cost of debt and hence it can be said that companies are often trying to follow the trend of the industry in order to structure their capital so that they have the best optimum combination available with themself, in accordance with the industry standards and it will also help them in order to maximize their rate of return.