No change gradual change or immediate change

In the last chapter, we implicitly assumed that firms that have debt ratios different from their optimal debt ratios, once made aware of this gap, will want to move to the optimal ratios. That does not always turn out to be the case. There are a number of firms that look under levered, using any of the approaches described in the last section, but choose not to use their excess debt capacity. Conversely, there are a number of firms with too much debt that choose not to pay down debt. At the other extreme, there are firms that shift their financing mix overnight to reflect the optimal mix. In this section, we look at the factors a firm might have to consider in deciding whether to leave its debt ratio unchanged, change gradually or change immediately to the optimal mix.

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