Company X has an EBIT of 1000 and has decided to spend 100 in painting its HQ's building. It can do it with Equity or with Debt (interest 5%). Tax rate is 30%. Please do the numbers and you'll see that if the Debt option is chosen the Net Profit will be lower. Why then have we kept saying from day 1 that Debt is cheaper than Equity? How come we choose the option that produces less profit and on top of that makes our company more leveraged and less solvent? What's going on here? Are we all wrong?

Answer rating: 100% (QA)

correct in that simply looking at the net profit in this specific scenario the debt option appears l... View the full answer