What issues should managers consider when making capital structure decisions?
Capital structure decision should be taken after considering the following points:
Expected cost of financial distress- Cost of both borrowing and obtained from shareholders should be considered before making capital structure decisions.
Asymmetric information- It provides better information to the managers regarding expected stock price, higher earnings in future, therefore all the points should be considered before making capital structure decisions.
Conditions in the stock market- It refers to the rate at which stock or debt will be sold or purchased. If the rates are reasonable then only purchase decisions are to be made.
Cash flow position- It is important to find that the company will have sufficient cash in the future so as to meet interest payment obligations.
Following are the points which a managers should keep in mind while making capital structure decision:
Expected cost of financial distress
Conditions in the stock market
Cash flow position
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