{"id":26543,"date":"2015-03-10T05:28:56","date_gmt":"2015-03-10T05:28:56","guid":{"rendered":"http:\/\/vskills.in\/certification\/blog\/?p=26543"},"modified":"2024-04-03T13:22:53","modified_gmt":"2024-04-03T07:52:53","slug":"capital-structure-determinants","status":"publish","type":"post","link":"https:\/\/www.vskills.in\/certification\/blog\/capital-structure-determinants\/","title":{"rendered":"Capital Structure: Determinants"},"content":{"rendered":"<p style=\"text-align: center\"><a ref=\"magnificPopup\" href=\"http:\/\/vskills.in\/certification\/blog\/wp-content\/uploads\/2015\/03\/Capital-Structure-Determinants.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-26597\" alt=\"Capital Structure Determinants\" src=\"http:\/\/vskills.in\/certification\/blog\/wp-content\/uploads\/2015\/03\/Capital-Structure-Determinants.png\" width=\"215\" height=\"182\" \/><\/a><\/p>\n<p>Capital Structure decisions depend on its\u00a0 Determinants. There are many determinants of capital structure, some of them are :-<\/p>\n<p><strong>Firm size<\/strong>: Larger\u00a0 firms\u00a0 are\u00a0 likely to have\u00a0 higher\u00a0 debt\u00a0 levels\u00a0 to\u00a0 maximize\u00a0 the\u00a0 tax\u00a0 benefits from\u00a0 debt. Large firms have a larger capacity for leverage due to lower bankruptcy risk and agency cost of debt with stable cash flows compared to smaller firms.<\/p>\n<p><strong>Tangibility<\/strong>: Firms with larger tangible assets have greater leverage capacity, which reduces the possibility of mispricing in the event of liquidation. Tangible assets, which can be used as collateral for debt, suffer a smaller loss of value when firms go into distress and reduce the scope of asset substitution effect.<\/p>\n<p><strong>Profitability<\/strong>: Profitable firms would employ more debt since expected bankruptcy costs are lower and expected tax shields are higher. Profitable firms carry a larger amount of debt due to the benefits of tax deductibility<\/p>\n<p><strong> Growth opportunities<\/strong>: Firms with growth opportunities may find it difficult and costly to rely on debt for financing as\u00a0 the\u00a0 degree\u00a0 of risk\u00a0 may\u00a0 be\u00a0 high\u00a0 for\u00a0 growth\u00a0 oriented\u00a0 investments. Firms with high growth rates tend to accept risky projects and try to increase the shareholders\u2019 wealth.<\/p>\n<p><strong>Non &#8211; debt tax shields<\/strong>: It acts as an alternative to interest tax shields of debt. Firms could reduce tax payments by using more debt rather than equity in financing their investments.<\/p>\n<p><strong>Business\u00a0 risk<\/strong>: Firms\u00a0 with high\u00a0 business\u00a0 risk\u00a0 are\u00a0 likely\u00a0 to face\u00a0 higher\u00a0 costs\u00a0 of\u00a0 bankruptcy\u00a0 and\u00a0 will\u00a0 therefore\u00a0 use less\u00a0 debt.<\/p>\n<p><strong>Liquidity<\/strong>: A firm should\u00a0\u00a0 have high liquidity in order to meet high debt service obligation. The disciplining\u00a0 benefit\u00a0 of\u00a0 debt\u00a0 due\u00a0 to\u00a0 agency\u00a0 problems\u00a0 causes\u00a0 cash-rich firms to\u00a0 acquire\u00a0 additional\u00a0 debt so\u00a0 that ,\u00a0 after\u00a0 meeting\u00a0 the\u00a0 debt\u00a0 servicing obligation, managers have\u00a0 little\u00a0 free\u00a0 cash\u00a0 flows.<\/p>\n<p><strong>Firm age<\/strong>: Younger firms cannot afford debt as their bankruptcy costs are high, and their earnings are too low to utilize the benefit of interest tax shield. Hence, age and leverage are expected to be positively related.<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"http:\/\/www.vskills.in\/certification\/accounting-banking-and-finance\">Click here for government certification in Accounting, Banking &amp; Finance<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Capital Structure decisions depend on its\u00a0 Determinants. There are many determinants of capital structure, some of them are :- Firm size: Larger\u00a0 firms\u00a0 are\u00a0 likely to have\u00a0 higher\u00a0 debt\u00a0 levels\u00a0 to\u00a0 maximize\u00a0 the\u00a0 tax\u00a0 benefits from\u00a0 debt. Large firms have a larger capacity for leverage due to lower bankruptcy risk and agency cost of debt&#8230;<\/p>\n","protected":false},"author":964,"featured_media":26597,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_joinchat":[],"footnotes":""},"categories":[1519],"tags":[1832,2132,1767,2534,2535],"class_list":["post-26543","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting-banking-and-finance","tag-capital-structure","tag-cost","tag-debt","tag-determinants","tag-size"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Capital Structure: Determinants - Vskills Blog<\/title>\n<meta name=\"description\" content=\"What are the Determinants of Capital Structure?\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.vskills.in\/certification\/blog\/capital-structure-determinants\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Capital Structure: Determinants - 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