Agency Costs and Capital Structure Decisions

Company Z has been experiencing increasing agency costs as a result of a misalignment between the interests of its shareholders and its management team. Management has been pursuing growth initiatives that require substantial capital investment, but these projects have yielded lower than expected returns. In an effort to mitigate agency costs and align management’s incentives with shareholder interests, Company Z is considering a financial restructuring. Which of the following capital structure decisions is most likely to reduce agency costs associated with the current situation?