What are the factors which will affect the capital structure of this company ?

Explanation

Capital structure refers to the proportion in which debt and equity funds are used for financing the operations of a business. A captial sutructure is said to be optimum when the proportion of debt and equity is such that, it results in an increase in the value of shares.
The factors that will affect the captial structure of this company are :
(i) Equity funds The composition of equity funds in the capital structure will be governed by the following factors.
(a) The requirement of funds of 'S' Ltd is for long-time .Hence equaity funds will be more approprite, but due of long gestation period, returns will materialise much later an a mix of more debt and less equity will be preferable. As per the imaginary plane,4 : 1 ration of debt and equity is there, thus equatiy must not be lesser than this, otherwise overall risk will increase.
(b) There are no financial risks attacked to this form of funding.
(c) if the company already has raised reasonable amount of debt funds, each subsequent borrowing will come at a higher interset rate and will increase the fixed charges.
(ii) Debt funds The usage and the ratio of debt funds in the capital stucture will be governed by factors like :
(a) The availability of cash flow with the company to meet its fixed financial charges. the purpose is to reduce the financial risk associated with such payments. which can further be checked by using . debt serivce coverage ratio.
(b) it will proive the benfit of trading on equity and hence, will increase the Eaching per share of equity shareholder. Howerver, Return on Investment, ratio will be the guiding principle behind it. the company should opt for trading on equity only when Return on Investment is more thant the interset rate on debt.
(c) Intersert on bedt funds is deducitble expense aned therefore, will reduce the tax liability and thus increase the gains of equity shareholders.
(d) It does not result in dilution of management control.