1. Market
Condition: -The pattern of capital is also influenced by prevailing
market conditions. Readiness of investors to purchase shares, interest rate,
stages of business cycle, tax, risk of investment, etc together form market
conditions.
2. Attitude
of Investor: -Attitude of investor also plays an important role in
determination of capital structure. The investor s who is ready to take risk
and expect higher returns prefer equity shares for investment. On the contrary,
cautions investors, who are interested in safe and assured income, invest in
debentures.
3. Cost
of Capital: -Cost of capital is one of the important factors while
designing capital structure. The cost of capital is the minimum return expected
by its supplier. The expected return depends upon the degree of risk. The high
degree of risk is assumed by shareholders than debt holder. In case of debt
holder, the rate of interest is fixed, while rate of dividend given to
shareholder is not fixed.
4. Government
rules and regulation: -Statutory obligations play important role in capital structure
decision. The SEBI has prescribed Debt:
equity ratio norm of 2:1. A
higher debt-equity ratio of 3:1 has
been permitted for large capital intensive project. The small industrial
projects are given concession and aid by government to avail more debt capital
as compared to equity capital.
5.
Attitude of financial institution:
-If financial institution
prescribes high terms of lending, then management has to move to other source
of financing. If financial
institutions prescribe easy terms of lending, it would be advantageous to
obtain funds at cheaper rate.
6. Rate
of Interest: -The prevailing rate of interest plays vital role in
determining capital structure. If prevailing interest rates are higher, firms
will delay debt financing. On the other hand, if prevailing interest rates are
lower, firm will opt debt financing.
7. Taxation:
-Interest paid against
debt is tax deductable expenditure. Dividend is not considered as tax
deductable expenditure for the company. As such, issue of debt is more
advantageous than issue of share capital.
8.
Competition:-
The firm
which are facing cut-throat competition prefer to issue equity shares because
their earnings are not certain and adequate. But the companies which have
monopolies may issue debt capital because of certainty of earnings.
