Jensen and Meckling (1976) also provide potentially important insights into the

Question

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 describe 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 Costs may produce an Optimal Capital Structure in the context of Jensen and Mecklings’ framework. Explain Michael Jensen’s notions of what types of firms should employ high levels of debt, and which should not. Describe two common bond covenants, and explain how they help to ameliorate conflict between bondholders and stockholders.

Explanation / Answer

A. Agency Conflicts between Corporate Managers & Stockholders

B. Agency conflicts between Bondholders & Stockholders

C. Company's which have huge cash flows and revenues that match financial expenses must employ high level of debt.

D. Bond covenants - two types - Operational and Financial in nature

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