Sometimes both debt and equity capital become

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Unformatted text preview: lable 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 452 PART 4 Long-Term Financial Decisions Review Questions 11–14 Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the optimal capital structure? 11–15 What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision? S U M M A RY FOCUS ON VALUE The amount of leverage (fixed-cost assets or funds) employed by a firm directly affects its risk, return, and share value. Generally, higher leverage raises, and lower leverage reduces, risk and return. Operating leverage is concerned with the level of fixed operating costs; financial leverage focuses on fixed financial costs, particularly interest on debt and any preferred stock dividends. The firm’s financial leverage is determined b...
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