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Unformatted text preview: debt because they can reap the positive benefits
of financial leverage, which magnifies the effect of these increases. Cash flow When considering a new capital structure, the firm must focus on its
ability to generate the cash flows necessary to meet obligations. Cash
forecasts reflecting an ability to service debts (and preferred stock)
must support any shift in capital structure. Contractual obligations A firm may be contractually constrained with respect to the type of
funds 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 man...
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This document was uploaded on 03/30/2014.
- Spring '14