The paper "Factors Affecting Capital Structure, Trade-Off and Pecking Order Theories" is a perfect example of finance and accounting coursework. Corporate and personal taxes are not the only factors that affect the financial mix. Capital structure refers to a way in which a company or a firm finances its assets through the combination of equity and debt assets or hybrid securities (Brealey et al. , 2012). The company may decide on whether to finance its activities by either a mixture of debts and equity from the share and investors or debt-equity by loans.
The capital structure involves making these two decisions of the type of securities to be used or the capital gearing in the cost of capital. A financial mix is affected by the following factors. Trade on equity which is the ownership of the firm. This element takes advantage of equity capital over the borrowed funds on the cost of capital. It is the additional revenue that the equity owners or the shareholders earn due to the issue of the bonds such as debentures and preference shares (Frank & Goyal, 1-37). If the rate of return on preference share capital and interest on loanable capital is small than the firm’ s revenue, then the shareholders have an advantage. Secondly, the degree of control, effects in such that if the company is made up of elected shareholders on equity.
The members have maximum rights to decide on the capital structure. Since the preference shareholders have fewer rights regarding voting; However, the capital structure is affected because it is made of debentures holders and loans and not equity shareholder. It is in such that the debentures holders have no rights in voting.
Thirdly, the financial plan flexibility. It depends on the financing plan used if it is debentures and loans they can be payable at any time while the equity capital is not refunded at any time which provides rigidity in the financial plan. The size of a company affects the capital structure in such that if a business is a small-sized its capital structure will consist of loans from the banks and retained profits. The large-sized company’ s capital structure may consist of goodwill, debentures, and issuance of stock.
As well as borrowings from big financial institutions (Bessler et al. , 137- 150) Obviously, the larger the firm, the greater the capitalization. The period of financing also is a major factor since if the businesses in a shorter time then loans are best while if it is in the long-term, the company may opt for the issuing of shares and debentures. Taxes also affect the capital structure by changing the decisions on financial assets to capitalize (Mackinlay, 1-52) The taxes absorb more risks it brings subsidy to debt finance and restricts securities for tax purposes.
Naturally, the cost of capital reduces the debt in structure increases. Thus, this appears there will be no equity at all. The firm's value increases by the PV of the tax shield. However, it is so difficult to build up a financial mix by the personal tax differences.