Agency Costs and Capital Structure Decisions

Medium Capital Structure Decisions Agency Costs

Company X is considering restructuring its capital to increase shareholder value. The management team believes that the optimal capital structure might lead to enhanced performance and shareholder returns. However, they are concerned about the potential agency costs that could arise from the restructuring process. Agency costs typically arise due to the conflicts of interest between management and shareholders.

In this context, which of the following statements best describes agency costs related to capital structure decisions?

Agency costs increase when debt is introduced into the capital structure as it may limit managerial discretion.

Agency costs are independent of the capital structure and arise solely from managerial compensation schemes.

Agency costs can be mitigated by increasing equity financing, which incentivizes managers to act in the interests of shareholders.

Hint

Submitted15.2K

Correct11.5K

% Correct75%