9. Factors affecting capital structure decisions Aa Aa In making capital structure decisions, financial managers must anticipate the common fears and desires, as well as the conflicting interests and concerns, of the firm's creditors and shareholders. This requires managers to recognize and manage the trade-offs associated with these two financing constituencies Ideally, financial managers should consider a variety of factors when establishing or changing a firm's capital structure. While the ultimate objective is the maximization of their shareholders' wealth, more immediate operational criteria include the market perceptions of the consequences of the manager's decisions on the firm's long-term viability and solvency, riskiness, and ability to generate cash flows when needed. Review the following two statements, and indicate which one is true and why. Statement 1 To address the concerns of many shareholders, some managers prefer to issue new debt securities or preferred stock when raising new long-term funds. Statement 2 The tax deductibility of equity financing provides an incentive to the firm's managers to add equity to its capital Statement is true because: O The firm's shareholders enjoy the increased net income and potential dividend income generated by the tax deductibility of the dividends. O A fundamental concern of shareholders is the potential dilution of their ownership interest in, and control over, the firm