Capital Structure Question:
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What are the external factors affecting capital structure?
Answer:
The external factors which are affecting the capital structure are as follows:-
1) Economic Conditions: If the economy is in state of depression, preference is given to equity form of capital which involves less amount of risk but it is avoided in some cases where the investor is not ready to take the risk. In this case company go on with the borrowed capital.
2) Interest Rates level : Form of borrowed capital will be delayed if the funds are available in high rates of interest but raising is not favourable.
3) Lending Policy : If policy is hard to understand and not flexible then it is good to go with the borrowed capital.
4) Taxation Policy: This policy should be viewed from both the sides from individual as well as corporate perspective. From the individual point of view both interest as well as dividend will be taxable in hands of lender.
1) Economic Conditions: If the economy is in state of depression, preference is given to equity form of capital which involves less amount of risk but it is avoided in some cases where the investor is not ready to take the risk. In this case company go on with the borrowed capital.
2) Interest Rates level : Form of borrowed capital will be delayed if the funds are available in high rates of interest but raising is not favourable.
3) Lending Policy : If policy is hard to understand and not flexible then it is good to go with the borrowed capital.
4) Taxation Policy: This policy should be viewed from both the sides from individual as well as corporate perspective. From the individual point of view both interest as well as dividend will be taxable in hands of lender.
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