Capital structure theory suggests that companies may put the interests of ________ ahead of the interests of ________.
A)Potential stockholders,existing stockholders
B)Stockholders,bondholders
C)Existing shareholders,IRS
D)There are no potential conflicts arising from the way a firm manages its capital structure.

Question

Quizplus · Accepted Answer

According to capital structure theory, when a company decides to increase its debt-to-equity ratio, it may benefit the shareholders by reducing their financial risk and increasing their returns through tax shields. However, this may pose a risk to bondholders who are already invested in the company, as an increase in debt also increases the risk of default. Therefore, companies may prioritize the interests of stockholders over the interests of bondholders in their capital structure decisions.

Capital Structure Theory Suggests That Companies May Put the Interests