Financing capital projects by issuing debt is substantially less expensive to a firm than issuing equity...

 

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Financing capital projects by issuing debt is substantially less expensive to a firm than issuing equity (common shares). From the investor's perspective the acceptable return on debt is lower than the anticipated return on equity and the cost of debt servicing can be written off thereby reducing the firm's taxes. Despite this, explain why a treasurer would not be advised to fund the entire cost of capital projects from debt. Financing capital projects by issuing debt is substantially less expensive to a firm than issuing equity (common shares). From the investor's perspective the acceptable return on debt is lower than the anticipated return on equity and the cost of debt servicing can be written off thereby reducing the firm's taxes. Despite this, explain why a treasurer would not be advised to fund the entire cost of capital projects from debt.

Answer rating: 100% (QA)

While financing capital projects with debt can be advantageous due to its lower cost compared to equity and the tax benefits associated with debt servicing there are several reasons why a treasurer wo... View the full answer