The factor that influences capital structure decisions are as follows:
The risk related to cash insolvency arises due to the failure in paying the fixed interests in liabilities. Usually, the higher proportion of the debt in the capital structure compels the firm to pay a higher rate of interest on the debt, irrespective of the fact whether the fund is available or not. The non-payment of the charges in interest and the principal amount in time invites the liquidation of the company.
The abrupt withdrawal of debt funds from the organization can cause cash insolvency. In the determination of capital structure, the risk factor of a company has an important bearing, and it can be avoided if the project was financed by the issues of equity share capital.
Risk in the variation of earnings
The higher the obligation contained in the capital structure of an organization, the higher will be the danger of variety in the normal income accessible to value investors. On the off chance that arrival on venture on absolute capital utilized (i.e., investors' reserve in addition to long term debt) surpasses the loan cost, the investors get a better yield.
Then again, if loan cost surpasses the degree of profitability, the investors may not get any arrival whatsoever.
The cost of capital refers to the cost of raising capital from various different sources of funds. It is the price paid for utilizing the capital. A business must generate sufficient revenue to fulfil its cost of capital and then finance the growth in the future. The finance manager must consider the cost of all sources of funds while designing the capital structure of a business.
The thought of holding control of the business is a significant factor in capital structure choices. On the off chance that the current value investors don't care to weaken the control, they may incline toward obligation money to value capital, as previously has no democratic rights.
The utilization of fixed enthusiasm bearing protections alongside proprietor's value as wellsprings of the fund is known as exchanging on value. It is a course of action by which the organization targets expanding the arrival on value shares by the utilization of fixed enthusiasm bearing protections (i.e., debenture, inclination shares, and so on).
On the off chance that the current capital structure of the organization comprises predominantly of the value shares, the arrival on value offers can be expanded by utilizing acquired capital. This is so on the grounds that the intrigue paid on debentures is a deductible use for personal expense evaluation, and the after-charge cost of debenture turns out to be extremely low.
Any abundance of income over the expense of obligation will be signified the value investors. In the event that the pace of profit for complete capital utilized surpasses the pace of enthusiasm on obligation capital or pace of profit on inclination share capital, the organization is supposed to exchange on value.
Capital structure is usually influenced by Government policies, rules, and regulations of SEBI and the lending policies of financial institutions that change the financial pattern of the company completely. The government's monetary policy and the fiscal policy also affect the decisions related to capital structure.
The size of the company influences the availability of funds. It is difficult for a small company to raise debt capital. The terms of long-term loans and debentures are less favorable for businesses. Small companies depend more on equity shares and retained earnings.
On the contrary, large companies issue different types of securities despite the fact that they have to pay less interest because the investors consider large companies less risky.
While choosing a capital structure, the money related conditions and brain science of various sorts of financial specialists should be remembered. For instance, a poor or working-class speculator may just have the option to put resources into value or inclination shares, which are for the most part of little groups, just a monetarily stable financial specialist can bear to put resources into debentures of higher divisions.
A mindful financial specialist who needs his money to develop will lean toward equity shares.
The capital structures of an organization ought to be with the end goal that it can raise assets as and when required. Adaptability gives space to development, both as far as lower sway on cost and with no noteworthy ascent in chance profile.
The period for which account is required likewise impacts the capital structure. At the point when assets are required for term debt long (say ten years), it ought to be raised by giving debentures or preference shares. Assets ought to be raised by the issue of equity shares when it is required permanently.
It has an extraordinary impact on the capital structure of the business, organizations having steady and certain profit lean toward debentures or preference offers, and organizations having no guaranteed pay rely upon inward assets.
The finance manager must comply with the legal provisions while designing the capital structure of a company.
The capital structure of an organization is likewise influenced by the motivation behind the financing. On the off chance that the assets are required for assembling purposes, the organization may secure it from the issue of long haul sources. At the point when the assets are required for non-fabricating purposes, i.e., government assistance offices to labourers, similar to a class, clinic, and so on, the organization may acquire it from inward sources.
At the point when corporate pay is liable to charges, obligation financing is good. This is made in light of the fact that the profit payable on value share capital and inclination share capital are not deductible for charge purposes, while intrigue paid on the obligation is deductible from pay and lessens an association's duty liabilities. The expense of saving money on premium charges decreases the expense of obligation reserves.
Besides, an organization needs to pay a charge on the sum conveyed as profit to the value investors. Because of this, complete income accessible for both obligation holders and investors is more when obligation capital is utilized in the capital structure. Along these lines, if the corporate assessment rate is sufficiently high, it is judicious to raise capital by giving debentures or taking long term debt advances from money related organizations.
The capacity of the business also affects the selection of capital structure in business for the purpose of generating cash flows. It also analyses the solvency position and the capability of the companies to meet its charges.
The provision related to the future requirement of capital must also be considered amidst the planning of the capital structure of a business enterprise.
