CS Executive · Corporate Accounting and Financial Management · Capital Structure
Which of the following is generally regarded as a feature of a sound or optimal capital structure?
A sound capital structure is flexible, allowing the company to raise or retire funds as conditions change. It also balances risk, return, control and solvency. Excessive debt, rigid composition or zero debt do not reflect an optimal structure.
- AMaximum use of debt regardless of the firm's earnings stability
- BRigid composition that cannot be changed when conditions alter
- CFlexibility, so that the firm can raise funds when needed without undue difficultyCorrect
- DComplete avoidance of any debt to keep control with promoters
Explanation
A sound capital structure is flexible, reasonably solvent, and balances risk and return. Maximum debt ignores risk and total avoidance of debt forgoes the tax advantage, while rigidity reduces adaptability.
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