explain cost of debt, cost of equity and tax rate as factors affecting the choice of capital structure.

Dear Student, 1) Cost of debt:- If an entity can arrange borrowed fund at low rate of interest then the entity will prefer more of debt as compared to entity. 2) Cost of equity:- Cost of equity capital (it means the expectations of the equity shareholders from the company) is affected by the use of debt capital. If the debt capital is utilised more, it will increase the cost of the equity capital. The simple reason for this is that the greater use of debt capital increases the risk of the equity shareholders. 3) Tax rate:- Higher the tax rate makes the debt cheaper as Interest paid to debt security holders is subtracted from income before calculating tax. So, high end tax rate means prefer debt whereas at low tax rate we can say prefer equity in capital structure. Regards!