Evaluate the key factors that should be considered by management when Essay

Evaluate the key factors that should be considered by management when deciding upon a particular capital structure - Essay Example More often than not, managers rely on the principles of financial planning and avoid sticking to any particular capital structure theory. Capital structure can be defined as â€Å"the composition or make-up of the company’s capitalization and includes all long-term capital resources, i.e., loans, reserves, shares and bonds† (Patra 2006, p.237). The importance of capital structure decisions cannot be overestimated, since firms are willing to utilize available business growth opportunities even when they lack sufficient financial resources to meet their strategic targets. What factors are the most important when considering capital structure decisions is difficult to define. The current state of literature of theoretical and empirical literature does not provide a single, comprehensive answer to the problem of capital structure decisions and the aspects, which influence them. It would be fair to assume that key aspects, which influence capital structure decisions, will va ry across firms and depend on the circumstances of each particular decision. However, managers must be able to create a complete picture of internal, external, and other factors affecting every single capital structure decision. Capital structure decisions: What do managers think? Contemporary scholars are increasingly interested in the relationship between capital structure decisions and various factors affecting them. ... Earnings per share dilution and financial flexibility are the two most important factors of capital structure decisions among European managers (Bancel & Mittoo 2004). Hedging considerations play an important role in how managers decide to manage firms’ financial capital (Bancel & Mittoo 2004). â€Å"Financial planning principles dominate specific capital structure models in governing financial decisions for the firms† (Pinegar & Wilbricht 1989, p.87). Mean industry leverage and financial risks are considered, too (Goyal & Frank 2004). The significance of financial structure decisions and knowledge of the aspects influencing them are justified by the fact that the prevailing majority of managers (82%) are willing to depart from the existing capital structure and leverage new resources, whenever they are presented with attractive growth opportunities (Pinegar & Wilbricht 1989). That managers do not stick to one particular capital structure model is further explained by t he fact that â€Å"there is actually no universal capital structure theory, and there is no reason to expect one† (Myers 2001). Obviously, managers taking capital structure decisions must take into consideration a variety of factors and influences. What exactly matters will depend upon the conditions and circumstances of each particular capital structure decision. Capital structure determinants and factors affecting capital structure decisions The determinants of capital structure decisions are numerous and varied. Collateral value of assets is believed to have defined effects on how managers manage firms’ capital. Simply stated, â€Å"capital structure decisions are heavily