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How We Choose a Capital Structure That Will Maximize the Shareholders Wealth

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11. How we choose a capital structure that will maximize the shareholders wealth? ( Run company from all equity? Or Run company from all debt?) The basic goal of financial managers is to maximize the level of shareholder wealth. Roe (2001,p.2) indicated that the maximization of shareholder wealth is a generally accepted process within the American corporate circles (Friedman,1970). The utilitarian viewpoint is that this is part of the price that is paid for very strong capital markets as well allocative efficiency. These benefits are further argued out to be so powerful that they may surpass the normative benefits enjoyed by employees over the shareholders. After all, employees and shareholders are noted to be better off with liquid and efficient capital markets. In order to choose a financial structure that maximizes shareholder wealth, it is best to run the company from all equity as opposed to all debt. This is because debt increases bankruptcy risks while equity leads to retained earnings. Equity makes a company to develop a solid internal source of finance. The earnings which a given company generates from equity is retained as capital and the company can then use this in financing the increased working capital as well as take care of other fund requirements. This then alleviates the hassles of having to raise funds from other sources. The company can then use equity in the effective achievement of the shareholder's wealth maximization objective by using the funds

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