Answer:
In this case, the various factors that are considered in determining the capital structure for the new venture will be: (i) Cost of Debt If the rate of interest on debt is high, the company should use less debt in its capital structure, and vice-versa. (ii) Cost of Equity When a company increases debt, the financial risk faced by equity shareholders increases. Thus, debt can be used upto a limit. Beyond that point, cost of equity may go up and share prices may decrease. (iii) Interest Coverage Ratio ICR refers to the number of times earnings before interest and tax covers the interest obligation. Higher the ICR, the company can borrow more funds and vice-versa.
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