The CFO of a company wants to change the capital structure of the company. Identify the factors which affect the choice of capital structure.

(A) Stock Market Condition
(B) Tax Rate
(C) Cost of Equity
(D) Level of Competition

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

The choice of capital structure is influenced by factors that affect how funds are raised and the cost of financing, such as:

• (A) Stock Market Condition: Affects the company’s ability to issue shares or raise capital through equity.

• (B) Tax Rate: Interest on debt is tax-deductible, so a higher tax rate makes debt financing more attractive.

• (C) Cost of Equity: Impacts the overall cost of capital and determines the proportion of equity in the structure.

(D) Level of Competition affects business strategy and operations, not directly the capital structure decision. However, it may affect the working capital requirements. Higher level of competitiveness may necessitate larger stocks of finished goods to  meet urgent orders from customers. This increases the working capital requirement. Competition may also force the firm to extend liberal credit terms discussed earlier.