Presentation on factors affecting capital structure decisions
- 1. PRESENTATION ON FACTORS AFFECTING CAPITAL STRUCTURE DECISIONS Presented by: Ms. Komal Mahajan Asst. Prof. in Commerce
- 2. CAPITAL STRUCTURE Capital Structure refers to the proportion in which debt and equity are used in the financing of a company.
- 3. OPTIMUM CAPITAL STRUCTURE Optimum Capital Structure refers to the capital structure which maximises the value of the company while minimising the overall weighted average cost.
- 4. FACTORS AFFECTING CAPITAL STRUCTURE DECISIONS 1. Financial Leverage 2. Cost of Capital 3. Cash flow Position of the Company 4. Control 5. Interest Coverage Ratio 6. Financial risk 7. Return on Investment 8. Reserves of the company 9. Type of the Company 10.Capital Market Conditions etc.
- 5. FINANCIAL LEVERAGE Financial Leverage/Trading on Equity Capital Structure Decision Yes Debt with Equity No Equity Only
- 6. COST OF CAPITAL Cost of Capital Capital Structure Decision Low Debt High Equity
- 7. CASH FLOW POSITION OF THE COMPANY Cash Flows Capital Structure Decision Strong/High Debt Weak/Low Equity *Since, interest payments on debt are compulsory while dividend payment on equity is not.
- 8. CONTROL Control over Management Capital Structure Decision Retain Debt Loose Equity
- 9. INTEREST COVERAGE RATIO Interest coverage ratio Capital Structure Decision High High Debt Low Low Debt/No debt
- 10. FINANCIAL RISK Level of Financial Risk Capital Structure Decision High High Debt Low Low Debt/No debt
- 11. RETURN ON INVESTMENT Return on Investment as compared to Rate of Interest Capital Structure Decision High Debt Low Equity
- 12. RESERVES OF THE COMPANY Level of Retained Profits Capital Structure Decision High No debt Low Debt
- 13. TYPE OF THE COMPANY Type of the Company Capital Structure Decision Public Utilities Debt Manufacturing Equity Trading Mix of both/Preference Shares
- 14. CAPITAL MARKET CONDITIONS Capital Market Conditions Capital Structure Decision Recession Debt Boom Equity
- 15. TAX CONSIDERATIONS Tax Deductibilty Capital Structure Decision Yes Debt No Equity
- 16. PURPOSE OF FINANCING Purpose of Financing Capital Structure Decision Investment in Long Term Projects Equity Investment in Short term Projects Debt
- 17. FLEXIBILITY Flexibility Capital Structure Decision Yes Debt with Equity No Equity
- 18. RESTRICTIONS BY SUPPLIERS OF CREDIT Restrictions by Lenders Capital Structure Decision More Equity Less Debt
- 19. SIZE OF THE COMPANY Size of the Company Capital Structure Decision Large Debt Small Equity
- 20. FLOATATION COSTS Floatation costs Capital Structure Decision Yes Equity No Debt
- 21. AGE OF THE COMPANY Age of the Company Capital Structure Decision Old High Debt New Low Debt