External factors which influencing the capital structure

Question

Write down the external factors which influencing the capital structure?

Answer 1

The external factors that are influencing the capital structure are illustrated below :-

i) Economic Conditions : If the economy is in state of despair, preference is given to equity form of capital that involves fewer amount of risk however it is avoided in some cases where the investor is not set to take the risk. In this case companies go on with the borrowed capital.

ii) Interest Rates level : Form of borrowed capital will be deferred if the funds are accessible in high rates of interest however rising is not favorable.

iii) Lending Policy : If policy is difficult to comprehend and not flexible then it is better to go with the borrowed capital.

iv) Taxation Policy : This policy must be viewed from both the sides from individual and corporate perspective. From the individual viewpoint both interest and dividend will be taxable in hands of lender.