Factors That Affect Capital Structure

Factors That Affect Capital Structure

1. Availability of securities – This influences the company’s use of debt finance which means that if a company has sufficient securities, it can afford to use debt finance in large capacities.
2. Cost of finance (both implicit and explicit) – If low, then a company can use more of debt or equity finance.
3. Company gearing level – if high, the company may not be able to use more debt or equity finance because potential investors would not be willing to invest in such a company.
4. Sales stability – If a company has stable sales and thus profits, it can afford to use various finances in particular debt in so far as it can service such finances.
5. Competitiveness of the industry in which the company operates – If the company operates in a highly competitive industry, it may be risky to use high levels of debt because chances of servicing this debt may be low and may lead a company into receivership.