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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