Factors affecting the choice of capital structure:

i. Cash flow position: If the cash flow position of the company is good, the payment of interest on the debt and the refund of capital can be easily made. Therefore, in order to take advantage of cheap finance, debt can be given priority.

ii. Cost: The cost of all the sources of finance is different. The rate of interest on debt, fixed rate of dividend to be paid on preference share capital and the expectations of the shareholders on the equity share capital are in the form of costs. If the situations happen to be favourable, the benefit of cheap finance can be availed of by choosing debt capital.

iii. Floatation cost: From the point of view of floating costs, retained profit is the most appropriate source. Therefore, its use should be made.

iv. State of capital market: Bullish time brings more profit. Therefore, the people like to invest more in equity shares. On the contrary, the profits are low when there is a bear market. The people give preference to debt capital in order to earn more profits. Therefore, the source of finance should be chosen keeping in view the position of the market.