Why should a firm have a capital structure a target debt A capital structure policy aims to balance the between the benefits of debt financing tax and the costs of debt financing distress and agency Every firm should set its target capital structure such that its cost and benefits of leverage ultimately maximise the Graham and Harvey asked 392 chief financial officers whether they use target debt Results show that the majority of them although the level of strictness of the target policy varies across different Only of the firms avoid target of which most are likely to be the relatively smaller This clearly indicates that there must be benefits from having a target debt The theory implies a model Jalilvand and In this firms set tentative debt ratios to which they gradually Firms with a debt ratio below the target ratio adjust their debt upward toward the target debt ratio and vice The behaviour depicted is indicative that a firm can use target debt ratio as a guiding principle to The target debt ratio is taken to be a reference point which enables value maximization for the The capital structure policy needs to be consistent with the funding given
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