aCapital structure refers to the financial structure of a firm. It is the mix of debt and equity capital maintained by a firm. The capital structure of a firm is very important since it relates to the ability of the firm to meet the needs of its stakeholders. Modigliani and Miller (1958) were the first to discuss the topic of capital structure and they argued that capital structure was irrelevant in determining the firms value and its future performance. On the other hand, Lubatkin and Chatterjee (1994) as well as many other studies have proved that there exists a relationship between capital structure and firm value.

Required: Discuss TWO (2) factors that a company should consider, in its circumstances, in choosing between equity finance and debt finance as a source of finance. (10 Marks)