In other words because of risk aversion the firms

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: agement 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 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 unavai...
View Full Document

Ask a homework question - tutors are online