Question

From the perspective of either an investor and firm, which of the financing ways is preferable? Debt or equity? Please justify your choice with relevant reasons (Not more than 200 words). [10 marks]

Answer 1

From the perspective of firm, I would be advocating that use of debt capital is better than use of equity capital because debt capital will be having an interest rate tax deduction associated with it. It will mean that interest which are payable on the debt capital are tax deductible in nature and hence it would be leading to decrease in the overall cost of debt and cost of debt decrease would be leading to overall cost of capital decrease and hence it is a important tool in order to increase the overall profits of the company by taking a higher amount of debt into the capital structure and getting more detection so that the overall cost of capital would be lower and the overall return on investment should would be higher.

When the company will be going for debt capital,it will mean that it will also not dissolve the equity capital and shareholders of the company will also be happier and it will also mean that it will give a scope for the company to maximize its growth because when the company will be having a higher return on the investment than the cost of capital,then it should be trying to take more of the debt capital in order to maximize its rate of return so I would be advocating that the company should be trying to take more debt capital instead of equity capital because debt capital will be providing with tax benefits as well as expansion benefits and shareholders will also be happy because their existing equity is not getting dissolved.