( Capital structure theory ) Which of the following statements most appropriately describes how agency costs affect a firm’s choice of capital structure? Explain. a. When firm owners borrow money, they have an incentive to engage in excessive risk taking (that is, investing in very risky projects) since they are managing someone else’s money. b. When firms have very limited investment opportunities and little debt financing combined with healthy profits that provide them with free cash flow , their management team might squander the firm’s earnings on questionable investments.

Foundations Of Finance

10th Edition

ISBN: 9780134897264

Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher: Pearson,

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Textbook Question

Chapter 12, Problem 7SP

(Capital structure theory) Which of the following statements most appropriately describes how agency costs affect a firm’s choice of capital structure? Explain.

a. When firm owners borrow money, they have an incentive to engage in excessive risk taking (that is, investing in very risky projects) since they are managing someone else’s money.
b. When firms have very limited investment opportunities and little debt financing combined with healthy profits that provide them with free cash flow, their management team might squander the firm’s earnings on questionable investments.

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Chapter 12, Problem 6SP

Chapter 12, Problem 8SP

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