Factors affecting target capital structure

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• does it mean that, the changes of capital structure in a firm is determine by the business risk, firm's tax position, financial flexibility, and managerial conservatism or aggressiveness? can this be come out with a regresionnal equation?

  • Yes, since capital structure is largely dependent upon these four factors therefore, in a regression equation capital structure could be dependent variable whereas business risk, firms tax position, financial flexibility, and managerial conservatism could be independent variables.

• I am in the 12th grade and am studying business studies as a subject. In my book, the following has been given under 'Factors affecting capital structure-Tax Rate':
  " Interest on tax is a tax deductible expense. So, cost of debt is affected by tax rate, e.g., borrowing@10% and the tax rate @ 30%, means the after tax cost of debt is only 7%.
  Suppose, 10% debentures Rs 1,00,000 & tax payable @ 30%.
  Profit before interest and tax=100000
  less: interest (10% of 100000)=10,000
  Profit before tax=90,000
  Therefore, tax=30% of 90,000=Rs 27,000
  If there is no debt, tax=30,000
  Tax savings=3,000
  So, net interest payable=7,000 which is 7% of Rs 1,00,000."
  I am not able to follow ANY of it..