Capital structure decision is related to proportion of debt and equity in the capital structure. What proportion is maintained, decides the cost and risks.
This is because both equity and debt differ significantily in their risk and returns .
(i) On one side, equity is a riskless, sources, but it has no benefit of tax deductibility of divisdend, and dividents are paid out of profits after tax.
(ii) On the other hand, debentures are3 paid fixed rate of interset, the interset paid are deductible from the income fortanx calculation purpose.
Thus, it creates a higher rate of reture for equity shareholders.
(i) On the other hand, debrentures are paid fixed rate of interser, the interset paid are dedutible from the income for tax calculation poruposes.
Thus, it creates a higher rate of returrn fro equity shareholders.
