Agency Cost Mitigation through Capital Structure Decisions

XYZ Corporation is contemplating restructuring its capital to address rising agency costs arising from conflicts of interest between its management and shareholders. These costs have been highlighted as a concern during recent shareholder meetings, particularly following an increase in management's discretionary spending on luxury office renovations, which has deterred potential investors. The company's current capital structure consists of 50% equity and 50% debt, with a stable revenue stream from its core operations.

The Board is evaluating three potential capital structure changes that aim to reduce these agency costs and align management's interests more closely with those of shareholders. As a CFA Level 2 candidate, your objective is to assess the most effective option based on your understanding of agency costs and capital structure effects.