Question

1. Discuss what considerations would enter a company’s determination of a prospective (optimal) capital structure. Feel free to reference M & M ‘s work.

Could you please answer question as a short essay 4-6 sentences

Answer 1

There would be various factors which are to be considered while determining the capital structure of the company-

1.liquidity -If the company has enough cash flows and it is highly liquid, it will take for a high amount of debt financing as it would not get affected by the fixed nature of payment.

2. Tax structure-if there is a high amount of tax, then the company would opt for debt financing as interest payable are Tax deductible, so higher amount of rate of tax would mean high amount of deduction.

3. Risk averse-if the company is highly risk averse, it would not be opting for any kind of debt financing and it will opt for more for equity financing.

4.nature of business and growth prospects of the company also determine the capital structure of the company to a large extent.