Choose the factors affecting capital structure.
(A) Risk Consideration
(B) Nature of business
(C) Cost of debt
(D) Growth prospects
(E) Flexibility
Choose the correct answer from the options given below.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (C) and (E) only
(A) Risk Consideration — A factor affecting capital structure (Correct). Use of debt increases financial risk.
(B) Nature of business — Not a factor affecting capital structure (Incorrect). It is not one of the factors that decide the capital structure.
(C) Cost of debt — A factor affecting capital structure (Correct). A firm that can borrow at a lower rate can use more debt.
(D) Growth prospects — Not a factor affecting capital structure (Incorrect). It is not one of the factors that decide the capital structure.
(E) Flexibility — A factor affecting capital structure (Correct). A firm should keep some borrowing power for unforeseen needs.
NCERT (2026-27 Edition): “9. Risk Consideration: As discussed earlier, use of debt increases the financial risk of a business. 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. …” “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.” “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.” |