Factors determining Capital Structure

Capital Structure: The most important function of Financial Management is to make decisions about the capital structure of firm. Capital structure refers to the make up a firm’s capitalization. It represents the mix of different sources of long term funds in the total capitalization of the company like equity shares, preference shares, retained earnings, long-term loans etc. In other words it can be precisely told as financing plan of the company.
Capital is required to finance investments in plant and machineries, inventory, accounts receivable and so on. A finance manager has to choose the most appropriate source of financing these activities from various sources available like equity, preference shares, debenture stock, term loans from banks or financial institutions, short term borrowings, supplier’s credit etc.
The various factors determining the capital structure of a firm are as follows,
a) Leverage or Trading on equity
b) Retaining control
c) Nature of the enterprise
d) Size of the company
e) Purpose of financing
f) Period of finance
g) Market sentiments
h) Cost of capital
i) Cash flow projections of the company
j) Government policy
k) Requirements of investors
l) Legal requirements
A company may raise funds from different sources such as equity shares, preferences shares, debentures, term loans etc. The use of these fixed charge sources of funds in the capital structure is known as financial leverage or trading of equity.
Capital structure is mainly influenced by the factor retaining control. The question of who will be having the control of fund management mainly affects the capital structure. Based on this factor the capital structure largely differs from one firm to another. In case if the company decides to retain the complete control of capital within the firm, then capital structure changes accordingly.
Nature of enterprise also influences the capital structure. In case of public enterprises the funds or finance or capital will be