What are the Trade-offs in Capital Structure Decisions?
Choosing the right capital structure involves trade-offs between:
Tax Savings: Interest on debt is tax-deductible, providing tax savings that can enhance firm value. Financial Distress: High levels of debt increase the risk of financial distress and bankruptcy. Control: Issuing new equity may dilute existing shareholders’ control over the company. Flexibility: Maintaining a balanced capital structure provides financial flexibility to respond to unexpected opportunities or challenges.