What Are The Factors Affecting Capital Structure?

• What is capital structure?

This refers to how assets are financed. A business, company or corporation will rarely have paid for all their assets outright. It is more likely that they will have used a variety of funding options to secure their assets. Funding options include loans, equity and hybrid securities. Hybrid securities comprise both debt and equity and offer flexible borrowing terms. It is possible to pay a fixed rate for an agreed amount of time, after which it converts to the underlying share.

• What factors affect capital structure?

Internal factors come from within the company and external factors can result from anything in society.
An internal factor that affects capital structure is how the money is going to be invested.  Low risk investments will only provide low interest rates but where there is increased risk then the interest rates will be significantly higher. This is because there is less likelihood of the money being paid back.
The economy is a major external factor. When economic conditions are good and people have more capital they are more likely to take risks with their investments. If the economy is depressed and capital is in short supply, investors will seek low risk investments.

1. Financial leaverage
2.cost of capital
3.cash flow position
4.interest coverage ratio
5.debt service coverage ratio
6.return on investment
7.nature and size of business
8.flexibility

Minimization of risk
control
flexibility'
profitability

What are the factors affecting capital structure?

Factors Affecting Capital Structure

Internal and external factors