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Unformatted text preview: unds that it can raise. For example, a firm might be prohibited from
selling additional debt except when the claims of holders of such
debt are made subordinate to the existing debt. Contractual constraints on the sale of additional stock, as well as on the ability to
distribute dividends on stock, might also exist. Management preferences Occasionally, a firm will impose an internal constraint on the use of
debt to limit its risk exposure to a level deemed acceptable to management. In other words, because of risk aversion, the firm’s management constrains the firm’s capital structure at a level that may or
may not be the true optimum. Control A management concerned about control may prefer to issue debt
rather than (voting) common stock. Under favorable market conditions, a firm that wanted to sell equity could make a preemptive
offering or issue nonvoting shares (see Chapter 7), allowing each
shareholder to maintain proportionate ownership. Generally, only in
closely held firms or firms threatened by takeover does control
become a major concern in the capital structure decision. External risk assessment The firm’s ability to raise funds quickly and...
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