How many of the following are factors affecting the choice of capital structure?
(A) Flexibility
(B) Seasonal factors
(C) Stock market conditions
(D) Inflation
(E) Growth opportunities
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Two
(A) Flexibility — Correct. A firm keeps some borrowing power unused to meet unforeseen needs. This is a factor in the choice of capital structure.
(B) Seasonal factors — Incorrect. Seasonal factors affect the working capital requirement: more in the peak season, less in the lean season.
(C) Stock market conditions — Correct. In a bullish market equity shares sell easily; in a bearish phase a firm may opt for debt. So the market affects the debt-equity choice.
(D) Inflation — Incorrect. The rate of inflation is one of the factors of the working capital requirement.
(E) Growth opportunities — Incorrect. Growth prospects decide how much fixed and working capital a firm needs. They are not among the capital structure factors.
NCERT (2026-27 Edition): “Factors affecting the Choice of Capital Structure … 10. Flexibility: If a firm uses its debt potential to the full, it loses flexibility to issue further debt. To maintain flexibility, it must maintain some borrowing power to take care of unforeseen circumstances.” “Factors affecting the Choice of Capital Structure … 13. Stock Market Conditions: If the stock markets are bullish, equity shares are more easily sold even at a higher price. Use of equity is often preferred by companies in such a situation. However, during a bearish phase, a company, may find raising of equity capital more difficult and it may opt for debt. Thus, stock market conditions often affect the choice between the two.” |