What control implications do a firm's capital structure decisions have?
A) Issuing too much debt as to cause financial distress
B) Dilution issues
C) Choice between debt and equity financing
D) All of the above

Question

Quizplus · Accepted Answer

All of the options listed (A, B, and C) have control implications for a firm's capital structure decisions.

A) Issuing too much debt can cause financial distress for a firm, which can lead to loss of control or even bankruptcy. This is because too much debt can cause a firm's interest expenses to rise to an unsustainable level, leading to difficulty in servicing its debt obligations. Creditors may require concessions or may take legal actions to recover their money, causing a loss of control for the firm's management.

B) Dilution issues arise when a firm chooses to raise capital by issuing new equity shares. This can lead to the dilution of ownership and control for existing shareholders, making it more difficult for them to influence the direction of the company.

C) The choice between debt and equity financing also has control implications. Debt financing requires regular interest payments and eventual repayment of the principal, which can limit a company's control over how it uses its cash flows. In contrast, equity financing involves selling ownership stakes in the company, which can dilute management's control over the company.

What Control Implications Do a Firm's Capital Structure Decisions Have