Generally only in closely held firms or firms

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Unformatted text preview: at favorable rates depends on the external risk assessments of lenders and bond raters. The firm must therefore consider the impact of capital structure decisions both on share value and on published financial statements from which lenders and raters assess the firm’s risk. Timing At times when the general level of interest rates is low, debt financing might be more attractive; when interest rates are high, the sale of stock may be more appealing. Sometimes both debt and equity capital become unavailable at what would be viewed as reasonable terms. General economic conditions—especially those of the capital market—can thus significantly affect capital structure decisions. Agency costs Asymmetric information Review Questions 12–14 Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the optimal capital structure? 12–15 What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision? CHAPTER 12 Leverage and Capital Structure 543 S U M M A RY FOCUS ON...
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