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1. Profitability (earnings and cash flow)- the capital structure chosen should ensure
maximum cash flow into the firm. The controlled use of debt may be encouraged
since debt is generally cheaper compared to equity.
2. Solvency – refers to the ability of the firm to service its debts obligation as they fall due to excessive use of debt may threaten a firm?s solvency and hence a trade off is required.
3. Flexibility- this refers to the ability of the firm to alter or modify its capital structure. Ideally, if the situation demands, then such a change should be at minimum cost and with minimum delay.
4. Control- the capital structure should involve minimum risk of loss of control by the current shareholders. This factor is especially important for small and closely held
firms.
5. Comparability- the capital structure of comparable company in the industry should
be considered because it might reflect the unique risks inherent in that industry
6. Information content signaling nature of capital structure- generally, excessive use of additional equity is perceived by investors and shareholders as indication of the
inability of the company to generate cash flows in future.
7. Stability of sales and earnings- the use of debt entails few obligations in terms of interest and principle repayment. It is therefore recommended for firms whose
sales or earnings are stable.
Kavungya answered the question on March 30, 2022 at 07:14
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Additional information:
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