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