(i) Cash flow position: While making a choice of the capital structure cash flow position should be kept in mind. Debt capital should be raised 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.
(ii) Cost of equity: 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. 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 share. This is not a good situation. Efforts should be made to aviod it.
(iii) Floatation costs: Floatation costs are those expenses which are incurred while issuing securities (e.g., equity shares, preference share, debentures,etc.). These include commission of underwriters, brokerage, stationery expenses, etc. Generally, the cost of issuing debt capital is less than the share capital. This attracts the company towards debt capital.
(iv) Stock market conditions: Stock market conditions refer to upward or downward trends in capital markets. Both these conditions have their influence on the selection of source of finance When the market is facing downward trend, investors are mostly afraid of investing in the share capital due to high risk.
On the contray, when conditions in the capital market are cheerful, they treat investment in the share capital as the best choice to reap profit. Companies should, therefore, make selection of capital sources keeping in view the conditions prevailling in the capital market.