Which of the following combination of factors affecting capital structure are correct ?

(A) Cost of debt, ROI, floatation costs

(B) Floatation costs, availability of raw material

(C) Level of competition, production cycle

(D) Cost of equity, Interest coverage ratio

(E) Risk consideration, flexibility

Choose the correct answer from the option given below :

(A), (D) and (E) only

The correct answer is option (2) : (A), (D) and (E) only

1. Cash flow position :company has cash payment obligations for (i) normal business operations; (ii) for investment in fixed assets; and (iii) for meeting the debt service commitments i.e., payment of interest and repayment of principal.

2. Interest Coverage Ratio (ICR): The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. This may be calculated as follows: ICR = EBIT/ Interest. However, this ratio is not an adequate measure.

3. Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio takes care of the deficiencies referred to in the Interest Coverage Ratio (ICR),It is calculated as follows: Profit after tax + Depreciation + Interest + Non Cash exp./ Pref. Div + Interest + Repayment obligation.

4.(R0I) : if the Rol 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.

5. Cost of debt: 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.

6. Tax Rate : A higher tax rate, thus, makes debt relatively cheaper and increases its attraction vis-à-vis equity.

7. Cost of Equity : When a company increases debt, the financial risk faced by the equity holders, increases. Consequently, their desired rate of return may increase.

8. Floatation Costs: Process of raising resources also involves some cost. Public issue of shares and debentures requires considerable expenditure.

9. Risk Consideration : Financial risk refers to a position when a company is unable to meet its fixed financial charges namely interest
payment, preference dividend and repayment obligations. Apart from the financial risk, every business has some operating risk (also called business risk).

10. Flexibility: If a firm uses its debt potential to the full, it loses flexibility to issue further debt.

11. Control: Debt normally does not cause a dilution of control. A public issue of equity may reduce the managements/ holding in the company and make it vulnerable to takeover.

12. Regulatory Framework. Every company operates within a regulatory framework provided by the law.

13. Stock Market Conditions: If the stock markets are bullish, equity shares are more easily sold even at a higher price.. However,
during a bearish phase, a company, may find raising of equity capital more difficult and it may opt for debt.

14. Capital Structure of other Companies: A useful guideline in the capital structure planning is the debtequity ratios of other companies in the same industry. There are usually some industry norms which may help