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Question
Which of the following external factors influences capital structure?
I. Level of interest rates
II. Level of stock prices
III. Dilution of value
IV. Tax policy on interest and dividends
Of these:
Which of the following external factors influences capital structure?
I. Level of interest rates
II. Level of stock prices
III. Dilution of value
IV. Tax policy on interest and dividends
Of these:
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Solution
The correct option is A I, II and IV are correct
The capital structure of a company consists of debt and equity. When the interest rates increase, the company relies more on equity and when the interest rate decreases, the company will borrow more funds. When the share prices increase, the lending agencies are willing to give loans to the company and vice-versa. When tax rates are high the business will borrow more funds rather than raising equity capital.Hence, option (C) is the correct answer.
The capital structure of a company consists of debt and equity. When the interest rates increase, the company relies more on equity and when the interest rate decreases, the company will borrow more funds. When the share prices increase, the lending agencies are willing to give loans to the company and vice-versa. When tax rates are high the business will borrow more funds rather than raising equity capital.
Hence, option (C) is the correct answer.
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