Which of the following factors influence the estimate of a business's optimal capital structure? (A) The amount of business (inherent) risk. (B) Lender/rating agency attitudes. (C) Industry averages. (D) The need to maintain financial flexibility (reserve borrowing capacity). (E) All of these factors influence the estimate.

Answer: Option E

Explanation:

A. If the inherent risk is high, company will go for equity capital and will avoid debt and preference capital. Thus inherent risk affects capital structure.

B. If the rating of the company is high as per famous rating agencies opinion then company can avoid equity and preference, the company can go for debt then. Thus rating affects capital structure.

C. The industry average tells the operational risk in the firms thus with high operational risk company can go for equity and preference.

D. If a company wants financial flexibility it should use debentures as it can be repurchased easily and should avoid equity. Thus financial flexibility affects capital structure.

Therefore, all of the factors mentioned affects the decision making regarding the capital structure.