Determinants of Capital Structure

Yesterday, we have taught the steps of determination of optimal capital structure. Except these steps, finance manager thinks about many other factors which affects the capital structure of a company. All these factors can be shown in the following list of determinants of capital structure.


1. Sales of Company 

Sales directly affects the capital structure of company. If there is a big company who can sell large quantity within one day, that company can keep more proportion of debt and less proportion of capital in his capital structure because such companies are of big size. They can get more capacity for repaying the loan without any problem. I can give the example of soft drink, its sale is summer season. So, all financial company can give the loan to soft drink companies because they know that sale of soft drink company is enough to repay the loan during the sale season time.

2. Profitability

Profitability is the second determinants of capital structure. Debt and equity will be decided on the basis of profitability. If company has power to control its expenses and earn more from its sale, then company can use more debt resources in the capital structure. Because there is positive relationship between increasing of profitability and debt. Creditors love interest on their given loan. If company has enough profit to pay the interest on the time, all creditors will give loan with full of happiness. If you do not get enough profit out of sale, you have to keep capital in your capital structure, because you need not give fixed interest to shareholders.

3. Physical Assets

If you have more assets in physical form, you can get more loan on these assets' security. So, you can benefit from this leverage. I think, there are very few financial companies who provide loan on intangible assets because to sell intangible assets is not so easy like selling of tangible assets. If you have not enough tangible assets, you should grow this by keeping more proportion on capital in your debt equity ratio.

4. Taxation

Do you know, you can save tax if you pay the interest? Very simple, because interest is deducted out of total incomes before charging tax. So, on less income, you will pay less tax. If there is high tax rate in your country, you can save tax by keeping more proportion of debt in your capital structure. Due to this, your earning per share will be highest.

5.  Risk of Bankruptcy

If your financial position is not good and there is big chance of your bankruptcy. At that time, to increase the debt is not intelligence. You should pay your debt as soon as possible because it will increase your capital proportion. You can save compulsory interest payment. When this risk will get out, you can increase the debt proportion in your capital structure.

We are showing following infographics in which you can understand more clearly what are the causes of making capital structure


Related : How to Determine Optimal Capital Structure

COMMENTS

Comments on this Website
.
Share above Content to Your Friends



Name

access account accountant Accounting accounting definitions accounting ebook Accounting education accounting procedure accounting process outsourcing Accounting Software advance advertising africa Amalgamation amendments announcements Annuity assets audit auditing Australia B.Com. balance sheet bank Bank reconciliation banking basic accounting BBA benefits best bill black money blog bloggers book keeping bookkeeping Branch Accounting - full tutorial budget Budget variance business businessman CA calculator canada capital capital budgeting career cash cash book cash flow statement Chiense children china class coaching coins college commerce commerce students company computer computer accounting conference Contact vinod kumar corporate accounting cost cost accounting cost center cost centre CPA credit credit card cs currency data Debit and credit debit cards debt debtor degree depletion depreciation documents dollar domain Downloads Dubai e-accounting earning education Education Loans email employee EPF ERP euromoney examination excel excise duty expenses facebook factor of loan fans feature fifo FII fiji finacle finance Financial financial accounting fire insurance flickr flow forensic forex formula france fraud free fun function fund GAAP GDP gdr germany gold goodwill goodwill accounting google google apps google apps google base google buzz google calendar Google docs google finance google fusion tables google talk govt. GST guide health Hindi Hindi Language history holding company How to treat FBT in Tally 9 HRA ICAI ICAWI ICICI Bank IFRS income income statement Income Tax India indian railway Indonesia inflation inflation accounting infographics information inspiration insurance insurance accounting interest international Internet Introduction of Tally 9 inventory investment invoice IT Japan Job costing journal entries Kalculate keyboard kindle kuwait laptop law LBT learning lease lecture ledger leducation Leverage Analysis liabilities lifo linkedin loan logical point loss loss of profit M.Com. m.phil malaysia management accounting manual accounting manufacturing account market marketing mastercard material MBA MCA media migration mobile money ms word ms. excel multi currency in tally 9 Multicurrency Accounting mutual fund national security new and sacrifice ratio new york times new zealand news NGO nonprofit-accounting North Georgia Mountains NPV NSE odbc office oman online application online accounting otcei pakistan parents pay pal pdf pie chart pie chart of income pnb podcast ppf presentation price privacy policy prize money prof. vinod kumar profit profit and loss account project management provision purchase puzzles quickbooks Quote quotes quotes of svtuition rating agency ratio analysis RBI readers real estate rectification of errors remote control reports reserves responsibility accounting retirement revenue Revenue reserves review risk rupees salary sale saudi arabia saving sbi scholarship school SEBI security service tax share share trading Shares shri lanka singapore sms social accounting society solution South Africa stock stock exchange structure student students study subsidiary company svtuition swiss bank tally tally 9 Tally 7.2 Tally 9 Tally.ERP 9 tanzania tax Tax Accounting TDS teacher teaching technology test testimonial testimonials thailand tips trading trading on equity transaction trend trial balance tuition twitter UAE UGC - NET Commerce UK United Arab Emirates university usa valuation VAT Video Voucher and vouching wikipedia working capital youtube
false
ltr
item
Accounting Education: Determinants of Capital Structure
Determinants of Capital Structure
http://2.bp.blogspot.com/-8IbbFPxT3D8/UbZ3Ge7n16I/AAAAAAAALns/2gGcBcd3LzI/s640/determinants+of+capital+structure.PNG
http://2.bp.blogspot.com/-8IbbFPxT3D8/UbZ3Ge7n16I/AAAAAAAALns/2gGcBcd3LzI/s72-c/determinants+of+capital+structure.PNG
Accounting Education
http://www.svtuition.org/2013/06/determinants-of-capital-structure.html
http://www.svtuition.org/
http://www.svtuition.org/
http://www.svtuition.org/2013/06/determinants-of-capital-structure.html
true
2410664366776677676
UTF-8
Not found any lecture VIEW ALL Readmore Reply Cancel reply Delete By Home PAGES Lectures View All RECOMMENDED FOR YOU Category ARCHIVE SEARCH ALL Lectures Not found any lecture match with your request, please help to write it and send it to our email at vinod@svtuition.org for making this website free accounting and finance encyclopedia. Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS CONTENT IS PREMIUM Please share to unlock