Understanding Agency Costs in Capital Structure Decisions

Very Easy Capital Structure Decisions Agency Costs

Company X has a capital structure composed of significant amounts of debt. In this scenario, some shareholders are concerned that the management team may take excessive risks in pursuit of higher returns, potentially endangering the company's financial stability. This situation exemplifies a phenomenon known as agency costs.

What are agency costs?

Costs incurred from the conflict of interest between stakeholders, primarily shareholders and management.

Costs associated with the issuance of new equity.

Costs related to the payment of interest on existing debt.

Hint

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