Impact of Agency Costs on Capital Structure

Easy Capital Structure Decisions Agency Costs

XYZ Corporation has recently undertaken a significant increase in debt financing to fund its expansion plans. However, this decision has raised concerns among shareholders regarding potential agency costs, particularly the possibility of the management taking on excessively risky projects that may benefit them at the expense of shareholder interests.

Considering the implications of agency costs in capital structure decisions, which of the following statements best reflects the potential impact of such costs on XYZ Corporation?

Agency costs generally increase as the company takes on more debt, leading to misalignment between management actions and shareholder interests.

Increased debt financing usually reduces agency costs because it limits management's ability to undertake unprofitable projects.

Agency costs have no relevance in determining the optimal capital structure of a company.

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