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3. Loss of Future Financing Flexibility: Greater the uncertainty about future financing needs -- > Higher Cost

Overall, if the marginal benefits of borrowing exceed the marginal costs, the firm should borrow money. Otherwise, it should use equity.

Overall, if the marginal benefits of borrowing exceed the marginal costs, the firm should borrow money. Otherwise, it should use equity.

What do firms consider when they make capital structure decisions? To answer this question, Pinegar and Wilbricht surveyed financial managers at 176 firms in the United States. They concluded that the financial principles listed in Table 7.4 determine capital structure decisions, in the order of importance in which they were given.

Table 7.4: Financial Principles Determining Capital Structure Decisions

Planning Principle by Order of Importance

Unimportant

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