In Each of the Theories of Capital Structure the Cost

question 59

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?

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Definitions:

Cost Formulas

Equations used to calculate costs, often incorporating fixed and variable components.

Static Planning Budget

A budget based on the level of expected output before the period begins, and it does not change in response to actual activity levels.

Variable Costs

Expenses that change in proportion to the level of production or sales activities, such as raw materials and direct labor costs.

Actual Costs

The real costs incurred in the production of goods or the provision of services.