Certified Financial Management Specialist Practice Exam

What is one factor that could lead corporations to choose different capital structures?

1. Type of business and industry standards

2. Influence of non-profit organizations

3. Public perception and brand image

4. Employee satisfaction levels

The correct answer is: Type of business and industry standards

One factor that could lead corporations to choose different capital structures is the type of business and industry standards. Each industry has its own norms and benchmarks regarding capital structure, which refers to the mix of debt and equity financing used by a corporation. For example, technology companies may favor equity financing to support rapid growth and innovation without the burden of debt repayment. In contrast, utilities and real estate companies often rely more heavily on debt financing due to the stable cash flows they generate, which can comfortably cover interest payments. By aligning their capital structure with industry standards, corporations can manage risks more effectively, optimize their cost of capital, and enhance their overall financial stability. This decision is influenced not just by the nature of the business itself but also by how investors view risk and return within that specific industry context.