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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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This document was uploaded on 01/19/2014.

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