Gujarat BoardEnglish MediumSTD 12 CommerceOCMFINANCIAL MANAGEMENT5 Marks
Question
Discuss the internal factors that affect capital structure.
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Answer
Internal factors that affect the capital structure:
$1.$ Type of business:
The type of business affects its capital structure. For example, manufacturing units require huge capital whereas normal trading units require less fixed capital
The fixed capital investment of a firm providing service depends on the type of service it provides. For example, a five star hotel requires huge capital as compared to a standard courier company.
$2.$ Size of business:
A large scale business unit will require large fixed capital as compared to a small scale industrial unit. Moreover, a trading firm will require even lesser fixed capital.
$3.$ Estimation of business income:
In business, although estimation of how much profit will be earned is done, still the estimation may go wrong. In such situation, the company has to depend on borrowed capital. In other words, the capital structure gets affected by estimation of business income.
$4.$ Nature and requirement of assets:
If the business requires fixed assets on large scale, then the ratio of equity/share will be high in capital structure of that business.
Another key decision that affects capital structure is whether these high value fixed assets are to be purchased or are to be taken on lease.
$5.$ Attitude of directors:
If the directors of the company desire to retain the managerial control on company they do not issue equity shares in greater proportion and depend more on preference shares and debentures.
$6.$ Financial requirements:
If the need of capital is less, it can be raised only by issuing equity shares. However, if the need of capital is large, various types of securities need to be issued for raising the fund.
How much finance will be required in future for long term objectives and plans and possibility of future growth is also to be considered while formulating capital structure.
$7.$ Duration of capita! requirement:
If capital is required on a permanent basis, the company will prefer to issue equity shares. On the other hand, if capital is required for a short period, company will procure capital through debentures and preference shares.
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