In Each of the Theories of Capital Structure, the Cost

question 382

Essay

In each of the theories of capital structure, the cost of equity rises as the amount of debt increases.
So why don't financial managers use as little debt as possible to keep the cost of equity down?
After all, isn't the goal of the firm to maximize share value (and minimize shareholder costs)?

---

Definitions:

Example

A representative case or instance used to illustrate or explain a principle or process.

Constraint Function

A mathematical expression that represents a limitation or condition that must be satisfied in optimization problems.

Example

A representative instance or illustration of a concept, situation, or practice, used for clarification or explanation.

Linear Optimization Models

Mathematical techniques used to achieve the best outcome, such as maximum profit or minimum cost, within a given set of linear constraints.