Final answer:
Managers should only change a firm's capital structure if it increases the firm's value for the benefit of all stakeholders, not just for managers or debtholders. These changes should be made transparently, keeping in mind the long-term success of the business.
Step-by-step explanation:
A manager should attempt to maximize the value of the firm by changing the capital structure only when such a change leads to an actual increase in the firm's value. It is imperative that this value enhancement benefits all stakeholders, ideally without decreasing shareholder value.The decisions on capital structure must be made strategically, as they have a significant impact on both the firm's risk profile and its ability to attract investment. Established firms with transparent information about products, revenue, costs, and profits, can attract financial capital more easily, paving the way for strategic decisions on capital raises through debt (bonds) or equity (stock).
Venture capitalists and other investors are willing to provide financial capital when they have confidence in the firm's management and future profitability.However, increasing value to the sole benefit of managers or debtholders, or at the expense of shareholders, generally goes against the principles of sound corporate governance and finance. A comprehensive approach considering the interests of all stakeholders is essential for the long-term success and growth of the business.