The following factors decide a company’s capital structure: 

(a) Stability of sales. For a company having a high sale turnover, a higher proportion of debt is suitable. For a company with fluctuating sales, a higher proportion of equity is suitable. 

(b) Cost of capital. Interest on debentures and dividend on shares is a cost of capital through debentures is a better option provided the company has regular income flows. If interest rate of raising debt is lower, then debt can be used. 

(c) Cash flow ability of the company. A company must have enough cash in hand or liquidity if it has to raise capital through debentures to pay interest in time. If cash inflows are not enough, then it should issue shares. 

(d) Control. To retain control over the management of the company, debentures and preference shares should be issued to raise capital. 

(e) Flexibility. Equity allows for more flexibility to change its capital structure according to market conditions while debt restricts this freedom. 

(f) Size of the company. Large companies are able to raise capital through shares more easily while smaller companies have to depend on their own sources or retained earnings as they do not get loans easily