Factors Influencing Choice of Capital Structure: 

Some of the important factors influencing the choice of capital structure of a firm are as follows:

 (1) Cash Flow Position: While making a choice of the capital structure, the future cash flow position should be kept in mind. Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital. 

(2) Cost of Equity Capital: Cost of equity capital (it means the expectations of the equity shareholders from the company) is affected by the use of debt capital. If the debt capital is utilised more, it will increase the cost of the equity capital. The simple reason for this is that the greater use of debt capital increases the risk of the equity shareholders. Therefore, the use of the debt capital can be made only to a limited level. If even after this level the debt capital is used further, the cost of equity capital starts increasing rapidly. It adversely affects the market value of the shares this is not a good situation. Efforts should be made to avoid it., 

(3) Interest Coverage Ratio-ICR: With the help of this ratio, an effort is made to find out how many times is the EBIT available to the payment of interest. The capacity of the company to use debt capital will be in direct proportion to this ratio. 

 It is possible that inspite of better ICR, the cash flow position of the company may be weak. Therefore, this ratio is not a proper or appropriate measure of the capacity of the company to pay interest. It is equally important to take into consideration the cash flow position.