Answer to Question #115431 in Macroeconomics for Ufaira

Question

There are various factors which affect the desired stock of capital. Discuss each and every one.

Answer 1

The desired stock of capital or desired capital stock refers to the total amount of capital a firm prefers to have to achieve profit maximization.

Answer and Explanation.

Organizations use debt financing or equity financing to oversee their desired stock of capital. However, some factors that affect the desired capital stock include:

• Corporate culture. Organization adapt equity financing compared to debt financing since it involves an extra cost of interest, which impacts on the desired capital stock
• Capital availability. An organization's source of capital financing, either debt or equity, impacts the desired capital stock. 
• Cost. Equity financing is cost-effective compared to debt financing due to high-interest rates, thus impacting on the desired stock of capital.