Question

'A public issue of equity may reduce the management 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.'
The factor affecting the choice of capital structure discussed in the above case is:

• A. Flexibility
• B. Cost of debt
• C. Cost of equity
• D. Control

Hint:

Maintaining control is crucial when making capital structure decisions, especially when management’s equity stake is low and vulnerable to dilution.

Answer 1

The Correct Option is D

Control is the factor influencing capital structure in this instance. Public equity issuance can reduce management's ownership stake, increasing susceptibility to takeovers. Businesses prioritize retaining control, particularly when their current shareholding is minimal. Therefore, control plays a significant role in the decision between debt and equity financing.