Question

Which of the following factors need NOT be important for determining a firm’s capital structure

A) TIE ratios under different scenarios

B) Lender/rating agency attitudes

C) Reserve borrowing capacity

D) To have some debt to ensure that a company does not become a target for takeover

E) Sound working capital management

Answer 1

Lender and rating agency attitudes are not important for determination of a firm capital structure because these are mostly external factors which are beyond the control of the company and this cannot be controlled and managed to a higher extent as they are the part of the systematic risk.

Times interest earned ratio and reserve borrowing capacity along with tendency of having some debt in overall capital structure and sound Working Capital management of the company are related to internal management of the company and they can be managed by the company to a higher extent.

Correct answer would be option (B) lenderr / rating agency attitude