Chapter 16, Problem 16.1CTF

Maximizing what will maximize shareholder value?

Summary Introduction

To identify: The maximization, which would increase the value of a shareholder

Introduction:

The capital structure is the specific distribution of an equity and debt that makes up the company finances.

Explanation of Solution

The financial managers want to have a common and a clear goal. They do not want conflicts to achieve their goals. As the value of the firm increases, the shareholders come ahead. Hence, the financial managers select the capital structure that maximizes the firm’s value, which in turn increases the shareholders’ value.

Conclusion

To maximize the shareholders’ value, the financial managers often select a capital structure that maximizes the firm’s value.