Fixed Capital

Factors Affecting the Choice of Capital Structure:
(i) Cost of Equity
- Increasing debt raises the financial risk faced by equity holders, leading to a higher expected rate of return on equity.
- If debt usage exceeds a certain level, cost of equity may rise sharply, reducing share prices despite higher earnings per share (EPS).
(ii) Control
- Debt financing does not dilute ownership, helping management retain control over the company.
- Issuing new equity shares reduces the promoters' holding, making the company more vulnerable to takeovers.
(iii) Stock Market Conditions
- In a bullish market, investors are more willing to buy equity shares at higher prices, making equity financing easier.
- In a bearish market, raising equity capital is difficult, leading firms to prefer debt financing instead.

Factors Affecting the Requirement of Fixed Capital:
(i) Choice of Technique
- A capital-intensive organization requires a higher investment in plant and machinery, as it depends more on automation and less on manual labor.
- On the other hand, labor-intensive organizations require a lower investment in fixed assets, thereby reducing their fixed capital requirement.
(ii) Financing Alternatives
- Companies can lease assets instead of purchasing them, reducing the funds required for fixed asset investment.
- The availability of leasing facilities helps reduce fixed capital requirements, as firms pay lease rentals instead of making large capital expenditures.
(iii) Growth Prospects
- Organizations expecting high growth require higher investment in fixed assets.
- To meet anticipated higher demand, companies may expand capacity, necessitating larger investments in fixed assets and increasing fixed capital requirements.