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:

External Pain

Pain that originates from outside the body, typically caused by external physical injury or stimulus.

Long-Lasting Aching Pain

A type of chronic pain characterized by a persistent and uncomfortable sensation of aching over extended periods.

Perceptual Preference

An individual's tendency to favor certain types of sensory information over others.

Social Processes

Patterns of interaction between individuals and groups that determine how societies are organized and how they function.