28.

'Determining the relative proportion of various types of funds depends upon various factors.' Explain any five such factors. 

Capital structure refers to the proportion of a company’s capital, financed through owners and borrowed funds. Determining the relative proportion of various types of funds depends upon various factors, and they are:
1) Cost of debt: A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate.
2) Tax Rate: Since interest is a deductible expense, cost of debt is affected by the tax rate. A higher tax rate, makes debt relatively cheaper and increases its attraction vis-à-vis equity.
3) Cost of Equity: Stock owners expect a rate of return from the equity which comes with the risk they are assuming. When a company increases debt, the financial risk faced by the equity  holders, increases. Consequently, their desired rate of return may increase. It is for this reason that a company cannot use debt beyond a point.
4) Floatation Costs: Process of raising resources also involves some cost. Public issue of shares and debentures requires considerable expenditure. Getting a loan from a financial institution may not cost so much. These considerations may also affect the choice between debt and equity and hence the capital structure.
5). Control: Debt normally does not cause a dilution of control. A public issue of equity may reduce the managements’ holding in the company and make it vulnerable to takeover. This factor also influences the choice between debt and equity especially in companies in which the current holding of management is on a lower side