Which of the following statements are correct?

(A) Deciding about the capital structure of a firm involves determining the relative proportion of various types of funds.

(B) Capital structure decision is essentially affected by the regulatory framework provided by the law.

(C) Capital structure depends on factors like cash flow position, Return on Investment, Cost of debt & Equity etc.

(D) Capital structure refers to the mix between reserves and borrowed funds.

Choose the correct answer from the options given below:

(A), (B) and (C) only

The correct answer is option 2- (A), (B) and (C) only.

(A) Deciding about the capital structure of a firm involves determining the relative proportion of various types of funds. IT IS CORRECT. Deciding about the capital structure of a firm involves determining the relative proportion of various types of funds. This depends on various factors. For example, debt requires regular servicing. Interest payment and repayment of principal are obligatory on a business. In addition a company planning to raise debt must have sufficient cash to meet the increased outflows because of higher debt. 

(B) Capital structure decision is essentially affected by the regulatory framework provided by the law.  IT IS CORRECT. Every company operates within a regulatory framework provided by the law e.g., public issue of shares and debentures have to be made under SEBI guidelines. Raising funds from banks and other financial institutions require fulfillment of other norms. The relative ease with which these norms can, be  met or the procedures completed may also have a bearing upon the choice of the source of finance.

(C) Capital structure depends on factors like cash flow position, Return on Investment, Cost of debt & Equity etc. IT IS CORRECT. 
Stock owners expect a rate of return from the equity which is commensurate with the risk they are assuming. When a company increases debt, the financial risk faced by the equity holders, increases. Consequently, their desired rate of return may increase. It is for this reason that a company can not use debt beyond a point. If debt is used beyond that point, cost of equity may go up sharply and share price may decrease inspite of increased EPS. Consequently, for maximisation of shareholders’ wealth, debt can be used only upto a level.
A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate. 
Size of projected cash flows must be considered before borrowing. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. 
If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater. 

(D) Capital structure refers to the mix between reserves and borrowed funds. IT IS NOT CORRECT as it is mix of owner and borrowed funds not reserves. Capital structure refers to the mix between owners and borrowed funds. These shall be referred as equity and debt in the subsequent text. It can be calculated as debt-equity ratio i.e., Debt/Equity  or as the proportion of debt out of the total capital i.e., Debt/(Debt + Equity). Debt and equity differ significantly in their cost and riskiness for the firm. The cost of debt is lower than the cost of equity for a firm because the lender’s risk is lower than the equity shareholder’s risk, since the lender earns an assured return and repayment of capital and, therefore, they should require a lower rate of return. Additionally, interest paid on debt is a deductible expense for computation of tax liability whereas dividends are paid out of after-tax profit. Increased use of debt, therefore is likely to lower the over-all cost of capital of the firm provided that the cost of equity remains unaffected.