This Presentation highlights the determinants of 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