Financial Management

Question

How ‘Capital Structure of Other Companies’ affects the capital structure decision?

Answer

Capital structure is influenced by the industry to which a company is related. All companies related to a given industry produce almost similar products, their costs of production are similar, they depend on identical technology, they have similar profitability, hence the pattern of their capital structure is almost similar. Because of this fact, there are different debt-equity ratios prevalent in different industries. Hence, at the time of raising funds a company must take into consideration that the debt-equity ratio prevalent in the related industry.

Sponsor Area