Managers should not change the capital structure unless it departs significantly from the optimal level because such a change would:
A)reduce dividends.
B)incur transactions costs.
C)increase fixed costs.
D)change incentives of stakeholders.
E)favour shareholders over debt holders.

Question

Quizplus · Accepted Answer

Changing the capital structure incurs transaction costs, such as fees for issuing new debt or equity or for retiring existing debt. Therefore, managers should only make significant changes to the capital structure when it is necessary to return to the optimal level, and avoid doing so on a frequent basis to limit transaction costs. The other options are not the main reasons why managers should be cautious when changing the capital structure.

Managers Should Not Change the Capital Structure Unless It Departs