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Discuss the factors that influence the selection of the capital structure (D/E ratio) by corporations.

Discuss the factors that influence the selection of the capital structure (D/E ratio) by corporations.

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Answer #1

Factors that influence the selection of the capital structure(D/E Ratio) by corporations:

1. The cost of equity in the market for the firm and cost of debts based on economic factors in the country and the rating of the company.
2. It depends on the size of the firm.
3. The D/E ratio should be chosen to obtain optimal WACC which helps in increasing value of firm and increases the shareholder wealth of a company.
4. The different macro factors like inflation , treasury bill yield, interest rate prevalent and taxes also play a role in determining optimum capital structure.

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