Financial Flexibility

This is essentially the firm’s ability to raise capital in bad times. It should come as no surprise that companies typically have no problem raising capital when sales are growing and earnings are strong. However, given a company’s strong cash flow in the good times, raising capital is not as hard. Companies should make an effort to be prudent when raising capital in the good times, not stretching its capabilities too far. The lower a company’s debt level, the more financial flexibility a company has. The airline industry is a good example. In good times, the industry generates significant amounts of sales and thus cash flow. However, in bad times, that situation is reversed and the industry is in a position where it needs to borrow funds. If an airline becomes too debt ridden, it may have a decreased ability to raise debt capital during these bad times because investors may doubt the airline’s ability to service its existing debt when it has new debt loaded on top.

4. Management Style

 Management styles range from aggressive to conservative. The more conservative a management’s approach is, the less inclined it is to use debt to increase profits. An aggressive management may try to grow the firm quickly, using significant amounts of debt to ramp up the growth of the company’s earnings per share (EPS).5. Growth RateFirms that are in the growth stage of their cycle typically finance that growth through debt, borrowing money to grow faster. The conflict that arises with this method is that the revenues of growth firms are typically unstable and unproven. As such, a high debt load is usually not appropriate.More stable and mature firms typically need less debt to finance growth as its revenues are stable and proven. These firms also generate cash flow, which can be used to finance projects when they arise.6. Market ConditionsMarket conditions can have a significant impact on a company’s capital-structure condition. Suppose a firm needs to borrow funds for a new plant. If the market is struggling, meaning investors are limiting companies’ access to capital because of market concerns, the interest rate to borrow may be higher than a company would want to pay. In that situation, it may be prudent for a company to wait until market conditions return to a more normal state before the company tries to access funds for the plant.

Some other factors which are also responsible to influence a company’s capital-structure decision are as follows:

(1) Cash Flow Position.

(2) Interest Coverage Ratio-ICR.

(3) Debt Service Coverage Ratio-DSCR.

(4) Return on Investment-ROI.

(5) Cost of Debt.

(6) Tax Rate.

(7) Cost of Equity Capital.

(8) Floatation Costs.

(9) Risk Consideration.

There are two types of risks in business:

(i) Operating Risk or Business Risk.         

(ii) Financial Risk. 

(10) Flexibility.

(11) Control.

(12) Regulatory Framework.

(13) Stock Market Conditions.

stability in earnings
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