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Factors Determine Choice of Capital Structure, Accountancy and Financial management Video Lecture | Accountancy and Financial Management - B Com
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FAQs on Factors Determine Choice of Capital Structure, Accountancy and Financial management Video Lecture - Accountancy and Financial Management - B Com
| 1. What is capital structure in finance? |  |
Ans. Capital structure refers to the mix of debt and equity used by a company to finance its operations and investments. It represents the proportion of different sources of funds utilized by a company to support its overall financial structure.
| 2. Why is capital structure important for a company? | |
Ans. Capital structure is important for a company as it affects its financial health and stability. The right mix of debt and equity can impact a company's cost of capital, profitability, risk, and ability to raise funds. It also influences the company's ability to meet its financial obligations and maximize shareholder value.
| 3. What are the factors that determine the choice of capital structure? | |
Ans. Several factors influence the choice of capital structure for a company, including:
- Business risk: The nature and volatility of a company's operations and industry.
- Financial risk: The company's ability to generate stable cash flows and cover its interest payments.
- Tax considerations: The tax advantages associated with debt financing.
- Cost of capital: The overall cost of financing and the availability of different sources of funds.
- Flexibility and control: The desire to maintain control over the company and the ability to adapt to changing circumstances.
| 4. How does a company's profitability impact its capital structure decisions? | |
Ans. A company's profitability influences its capital structure decisions as it affects its ability to service debt. A highly profitable company may prefer to rely more on equity financing to avoid the risk of financial distress associated with higher debt levels. On the other hand, a less profitable company may choose to leverage its operations by utilizing more debt to benefit from the tax advantages and potential higher returns on equity.
| 5. Can a company change its capital structure over time? | |
Ans. Yes, a company can change its capital structure over time based on various factors such as business needs, market conditions, and financial performance. A company may decide to increase or decrease its debt-to-equity ratio by issuing new debt or equity securities, repurchasing existing securities, or restructuring its existing obligations. However, any changes in capital structure should be carefully evaluated to ensure they align with the company's financial goals and risk tolerance.
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Nov 22, 2024 Last updated |
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