What is the single most important determinant of capital structure for a company?
A) Business risk
B) Financial risk
C) Exchange rate risk
D) Interest rate risk

Question

Quizplus · Accepted Answer

Business risk, which refers to the potential variability of a company's operating income, is considered the most important determinant of capital structure. This is because companies must be able to generate sufficient cash flow to service their debt obligations, and business risk can impact a firm's ability to do so. Companies with high business risk may prefer a lower level of debt to reduce the potential for financial distress, while companies with lower business risk may be more willing to take on greater levels of debt. Financial risk, exchange rate risk, and interest rate risk are also important factors in determining capital structure, but are generally considered secondary to business risk.

What Is the Single Most Important Determinant of Capital Structure