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CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Capital Structure

A firm chooses a capital structure with the aim of keeping unused borrowing capacity so that it can raise debt quickly in future when opportunities arise. This capital structure consideration is called:

The consideration is flexibility. A firm that deliberately keeps reserve borrowing capacity can change its financing mix quickly as needs arise, which is what flexibility means in capital structure planning, unlike control, which concerns ownership dilution.

  1. AFlexibilityCorrect
  2. BControl
  3. CMarketability
  4. DCapacity of the firm

Explanation

Flexibility means the firm keeps the ability to adjust its capital structure to changing needs, typically by maintaining reserve borrowing power. Control relates to dilution of ownership and marketability to the timing and ease of issuing securities.

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