Question

Explain how the following factor affects the choice of capital structure of a company:

Stock market conditions

Answer 1

1. When choosing a company's capital structure, the state of the stock market is a major factor.
2. Companies may choose to issue equity shares when the stock market is doing well and investor sentiment is favorable because they are likely to receive attractive values and considerable investor interest.
3. However, investors may be more cautious and the cost of equity may be greater if the stock market is going through downturns or high volatility.
4. Companies may choose to raise money through debt in certain situations in order to prevent ownership from being split at unfavorable valuations.
5. Therefore, whether a business chooses debt or equity financing is greatly influenced by the state of the stock market.