Question

Which of the following internal factors influence capital structure?
I. Cost of capital
II. Risk
III. Transferability
IV. Increased owner's profits

• A. I and II are correct
• B. III and IV are correct
• C. I, III and IV are correct
• D. All are correct

Answer 1

The correct option is D All are correct

Capital Structure constitutes two words i.e. Capital and Structure. The word $‘capita{l}^{\prime }$ refers to the investment of funds in business while ‘structure’ means arrangement of different components in proper proportion.

Factors affecting capital structure:

Cost of capital : - It is a process of raising the funds which involves the cost in planning the capital structure, the use of capital should be capable of earning revenue to meet the cost of capital.

Risk Factor:- Risk influence the capital structure of the company.Debt contains low risk and hence debts are cheap whereas shares possess higher risk with higher return.

Transferability:- Many companies put their securities for quotation on the

stock exchange quotations and improve the transferability of shares.

Increased owner's profits:- Equity stock may result in a possible increase of operation to control in an enterprise.