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5. In what way is the decision on capital structure related to the company’s expected earnings?

5. In what way is the decision on capital structure related to the company’s expected earnings?

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Answer #1

Decision on capital structure is based on debt equity ratios. They are long term capital sources for any company. Capital structure is a source to fund the growth opportunities of any company.

When a company has debt, it can take advantage of tax shield and increase return to equity shareholders. But with increase in debt, the risk for shareholders also increase.

Also, the retained earnings of each year is added onto the equity portion of the company.

Company's expected earnings can increase with the optimal debt equity ratio in capital structure.

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