Page 4 - Lesson Note 4

flotation cost. Whereas there is less cost involved in raising capital by loans

or advances.
9. Risk consideration.

Financial risk refers to a position when a company is unable to meet its
fixed financial charges such as interest, preference dividend, and payment

to creditors etc.
If firm’s business risk is low then it can raise more capital by issue of debt
securities where as at the time of high business risk it should depend upon

equity.

10. Flexibility.
Excess of debt may restrict the firm’s capacity to borrow further. To
maintain flexibility it must maintain some borrowing power to take care of

unforeseen circumstances.

11. Control.
The equity shareholders are considered as the owners of the company and

they have complete control over the company. If existing shareholders
want complete control then they should prefer debt, loans of small

amount, etc. If they don’t mind sharing the control then may go for equity
share also.
12. Regulatory framework.

Issues of shares and debentures have to be done within the SEBI guidelines
and for taking loans. Companies have to follow the regulations of monetary

policies.
If SEBI guidelines are easy then companies may prefer issue of securities for

additional capital whereas .If monetary policies are more flexible then they
may go for more loans.

13. Stock market condition.
There are two main conditions of market, .i.e. Boom condition and

recession or depression condition. These conditions affect the capital
structure especially when company is planning to raise additional capital.