What are the techniques of deciding upon company capital structure?

1. Examine what companies in similar lines of business have decided about the amounts they will borrow.

–          The best way to do this is to look at company averages for borrowing ratios in the industry of interest.

–          The distance of a company’s debt ratio from the industry average determines the borrowing decision.

1. Financial planning – a detailed examination of the company’s future cash-flow expectations (including those associated with the borrowing alternatives under consideration) so as to decide upon the best choice of financing method.

–          The company financial planner, in possession of a capacity to simulate the cash flow and financial statements of the company across the future, asks a series of what-ifs of the planning model.

–          The result is a set of possible future outcomes for the company under the sets of conditions / financing alternatives that the planner examines.