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CFA Level 2
Corporate Finance

Agency Costs and Capital Structure Decisions

Medium Capital Structure Decisions Agency Costs

XYZ Corporation is considering a new capital structure to fund its expansion plans. The management is concerned about potential agency costs that could arise if they heavily leverage the firm. The firm currently has a mix of debt and equity financing but is contemplating an increase in debt levels.

The management team believes that taking on more debt may impose costs relating to the agency relationship between the shareholders and the debt holders. Specifically, they are worried that if the company takes on excessive debt, management might make riskier investments, harming the interests of the debt holders.

Considering the relationship between leverage and agency costs, which of the following statements is most accurate?

Hint

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