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Homework answers / question archive / The factors that are listed below raise some interesting thoughts
The factors that are listed below raise some interesting thoughts. If you were calling the shots for any organization where would you focus your attention?
Management Attitudes: There is room for managerial judgment (i.e., tastes and preferences) in determining a firm's optimal capital structure. Where do you stand on this issue?
Growth Rate: lower flotation costs favor the use of debt, but higher uncertainty favors the use of equity.
Firm's Internal Conditions: the choice of debt or equity can be influenced by whether management thinks the firm is overvalued or undervalued by the market.
Considering the obligation to payback your debt or use equity to finance capital projects...what would you do?
Let us take each point one by one:
? Management Attitudes?there is room for managerial judgment (i.e., tastes and preferences) in determining a firm's optimal capital structure.
If management is conservative, than it will prefer lower debt and higher equity. On the other hand aggressive or risk taking attitude can go for high debt also.
Growth Rate: lower flotation costs favor the use of debt, but higher uncertainty favors the use of equity.
Debt is cheaper than equity but it has got higher risk also. Thus during the upswing or boom times one will prefer debt, other wise equity is preferable
? Firm's Internal Conditions?the choice of debt or equity can be influenced by management thinks the firm is overvalued or undervalued by the market.
If the firm is overvalued than it can use equity as the dilution of equity will be less. In case of undervaluation debt is preferable.
