Jensen and Meckling (1976) also provide potentially important insights into the choice of Capital Structure. They discuss Agency Conflicts and the Costs associated with these them.

Describe the Agency Conflicts between Corporate Managers and the Stockholders of the firm. Next, describe the Agency Conflicts between the Bondholders and Stockholders of a firm.

Be sure to describe how the level of debt in capital structure will affect both types of agency conflicts. Explain likely differences in preferences about Payout Policies between the manager, the stockholders, and the bondholders.

Describe how the trade-offs between the different classes of Agency Conflicts and Costs may produce an Optimal Capital Structure in the context of Jensen and Mecklings' framework.