Capital Structure Question:
What are the internal factors affecting capital structure?
Answer:
The internal factors which are affecting capital structure are as follows:-
1) Cost of capital : - it is a process of raising the funds which involves the cost in planning the capital structure, the use of capital should be capable of earning revenue to meet the cost of capital. There are changes in this because of two reasons:
(i) Interest rates are less than dividend rates.
(ii) Interest paid on borrowed capital is an allowable for income tax purposes.
2) Risk factor : Company raising the capital by borrowed capital, as it accepts the risk in two ways:
(i) Company maintains the payment of interest as well as installments of borrowed capital at predecided rate and time without being concerned about the profits and losses.
(ii) Borrowed capital is secured capital in the case where the company fails to meet the contract done with the lenders of the money.
3) Control Factor: These factors have been considered by the private companies while raising additional funds and planning the capital structure. In this company plans to raise long term funds by issue the equity and preference shares. It doesn't have relation with the borrowed capital.
1) Cost of capital : - it is a process of raising the funds which involves the cost in planning the capital structure, the use of capital should be capable of earning revenue to meet the cost of capital. There are changes in this because of two reasons:
(i) Interest rates are less than dividend rates.
(ii) Interest paid on borrowed capital is an allowable for income tax purposes.
2) Risk factor : Company raising the capital by borrowed capital, as it accepts the risk in two ways:
(i) Company maintains the payment of interest as well as installments of borrowed capital at predecided rate and time without being concerned about the profits and losses.
(ii) Borrowed capital is secured capital in the case where the company fails to meet the contract done with the lenders of the money.
3) Control Factor: These factors have been considered by the private companies while raising additional funds and planning the capital structure. In this company plans to raise long term funds by issue the equity and preference shares. It doesn't have relation with the borrowed capital.
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