Corporate managers and stockholders of firm

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Jensen and Meckling (1976) also provide potentially important insights into the choice of Capital Structure.

They discuss Agency Conflicts and the Costs associated with these. Describe the Agency Conflicts between Corporate Managers and the Stockholders of the firm. Next, describe the Agency Conflicts between the Bondholders and Stockholders of a firm. Be sure to carefully explain how the level of debt in capital structure will affect both types of agency conflicts. Describe how the trade-offs between the different classes of Agency Conflicts and the associated Costs may produce an Optimal Capital Structure in Jensen and Mecklings’ framework. Carefully, explain Michael Jensen’s notions of what types of firms should employ high levels of debt, and which should not. Describe the “Under Investment Incentive” that Stewart Myers outlined in “Determinants of Corporate Borrowing” (1977). What is the source of this incentive? What is a sinking fund, and describe how such an arrangement would reduce the Under Investment Incentive?

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Reference no: EM132247237

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