Explain briefly any four factors which affect the choice of capital structure of a company.

Factors affecting the choice of capital structure of a company:
i. Cash flow: Debt should be opted by the company only if it has a strong cash flow position. The cash flow of a company should be enough to pay the expenses and debt and other obligations and further left with surplus also. This is because, at the time of debt, cash is required to pay the principle amount and the interest as well.
ii. Debt-service coverage ratio (DSCR): It depicts the cash payment obligations of a company as against its availability of cash. In other words, it reflects the cash flow position of the company. In case DSCR is high, the company can opt for more debt.
iii. Equity cost: The rate of return expected by the shareholders is directly associated with their investment. Thus cost of equity depicts the financial risk faced by the company. If the financial risk is higher, then the shareholders expect a higher return. This, in turn, implies a rise in the cost of equity. However, if the cost of equity is high, then it would be difficult for the company to opt for more equity.
iv. Condition of stock market: In situations of good stock market conditions, the company can easily opt for equity capital and in case of poor stock market it becomes difficult to opt for equity.