Due to both financial distress and agency costs, a firm should have a capital structure that
A)contains all debt
B)contains all equity
C)contains both debt and equity
D)contains only long-term debt

Question

Quizplus · Accepted Answer

A firm should have a capital structure that contains both debt and equity to balance the costs and benefits of each. Debt can provide tax benefits and be cheaper in the short term, but also carries financial risk and imposes restrictions on the firm. Equity can provide more flexibility and align interests between shareholders and management, but dilutes ownership and may not be as tax-efficient. A balanced mix of debt and equity can optimize the firm's capital structure and minimize agency costs.

Due to Both Financial Distress and Agency Costs, a Firm