Intro. to Financial Management

Different industries have different capital structure which is based on the risk associated with its operations . The four factors that may influence capital structure decision are

Business Risk : Risk is the primary subject area of all the businesses The greater the firm 's business risk , the lower would be the probability of an optimal debt ratio

Tax Position : Use of debt is favorable to businesses in the sense that interest is tax deductible , which lowers the effective cost of debt . If the firm 's income is already suffering from tax deductions by

br depreciation tax shields , by interest on current debt then additional debt will not rescue the course of the firm with a higher effective tax rate

Financial Flexibility : Raising capital under rough business conditions is quite a tedious task . Although to cope with this scenario directors of the company know that steady flow of capital is pivotal for the company 's survival . Incase of economic recession , when the company might require funds to run its operational activities the capital providers provide funds to those firms whose balance sheet reflects stronger financial position . On this whole scenario we can say that the shortage of funds will bear a consequence not only on the present but also on the future needs

Managerial Business Strategy : Firm 's aggressive and conservative business policies may also have an impact on the firm 's optimal capital structure . Some firms favor the use of debt for generating its business profits , which is an aggressive business strategy...