CS Executive · Corporate Accounting and Financial Management · Capital Structure
Which feature is generally regarded as a characteristic of a sound or optimal capital structure?
Flexibility is a feature of a sound capital structure, meaning the firm can adjust its funding by raising or repaying capital as needs change. Other features include low cost, moderate risk and control retention, while excessive debt or a single source is undesirable.
- AMaximum use of debt irrespective of the firm's ability to meet interest
- BFlexibility, so that the firm can raise or retire funds as needs changeCorrect
- CRigid reliance on a single source of finance
- DHighest possible cost of capital to protect lenders
Explanation
A sound capital structure is flexible, reasonably solvent, controllable and cost-minimising. Excessive debt and a single source reduce flexibility and raise risk, and a high cost of capital lowers value.
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