In making capital structure decisions, financial managers must anticipate the common fears and desires, as well as the conflicting interests and concerns, of the firm's creditors and shareholders. This requires managers to recognize and manage the trade-offs associated with these two financing constituencies. Ideally, financial managers should consider a variety of factors when establishing or changing a firm's capital structure. While the ultimate objective is the maximization of their shareholders' wealth, more immediate operational criteria include the market perceptions of the consequences of the manager's decisions on the firm's long-term viability and solvency, riskiness, and ability to generate cash flows when needed. Review the following two statements, and indicate which one is false and why. The costs of financial distress encourage the use of more highly debt-laden capital structures. Managers' attitudes toward risk often have a significant impact on their choice of capital structure. Statement is false because: The costs of financial distress, including the direct, indirect, and opportunity costs of insolvency and bankruptcy, generally constrain the use of debt financing and are incurred when a firm cannot service the interest and principal payments on its borrowed capital. Managers' risk preferences are a reflection of those of the firm's shareholders, which means that the managers' individual risk preferences cannot be reflected in the activities or condition of the firm