Final answer:
Managers should select the capital structure that aligns with the firm's financial needs, risk tolerance, and growth objectives, while maximizing shareholder value.
Step-by-step explanation:
The capital structure that managers should select depends on various factors, including the financial needs of the firm, the risk tolerance of the management, and the cost of capital. However, the main objective should be to maximize the value of the firm and its shareholders. In general, managers should choose a capital structure that balances the advantage of borrowing money with the disadvantage of giving up ownership of the company.
For example, if the firm has a stable and predictable cash flow, it may be beneficial to issue bonds to finance its operations. Bonds allow the firm to borrow money at a fixed interest rate, which can be lower than the cost of equity. On the other hand, if the firm has a high growth potential and wants to retain control, it may choose to issue stock instead. By issuing stock, the firm can raise capital without incurring debt, but it also dilutes ownership and gives shareholders voting rights.
In summary, managers should select the capital structure that aligns with the firm's financial needs, risk tolerance, and growth objectives, while maximizing shareholder value.