Question

Explain the following factors which affect the choice structure of a company:-
(a) cash flow position (b) Tax rate.

Answer 1

• Position of cash flow Size of projected cash flow must be considered before issuing debt. Cash flow must not only cover fixed cash payment obligations but there must be sufficient cash for smooth working of the business
• Tax rate Interest is a deductible expense. Cost of debt is affected by the tax rate. A higher tax ratemakes debt relatively cheaper and increases its attraction in relation to equity.