A manager should attempt to maximize the value of the firm by changing the capital structure if and only if the value of the firm increases:
A)as a result of the change.
B)to the sole benefit of the managers.
C)to the sole benefit of the debtholders.
D)while also decreasing shareholder value.
E)while holding stockholder value constant.

Question

Quizplus · Accepted Answer

The primary objective of a manager is to maximize shareholder value. Changing the capital structure by issuing more debt or equity can affect the value of the firm. Therefore, a manager should only attempt to change the capital structure if it increases the value of the firm. This is in the interest of the shareholders who will benefit from the increase in value. Choices (B) and (C) are incorrect because the manager should not attempt to change the capital structure for the sole benefit of any one group but should aim to maximize the overall value of the firm. Choice (D) is incorrect because the manager should not attempt to decrease shareholder value. Choice (E) is also incorrect because a manager should attempt to increase shareholder value, not hold it constant.

A Manager Should Attempt to Maximize the Value of the Firm