Choose the factors affecting capithal 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 :

(A), (C) and (E) only

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

Cost of debt(C): 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.

Risk Consideration(A): 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

Flexibility(E): 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.