Question

what are the factors that can influence a company’s decision to issue debt or equity when raising capital？

Answer 1

Factors that might affect a f company’s decision to issue debt or equity when raising capital
1. Cost of Debt : Higher the cost of debt leverage more equity should be increased to obtain optimal capital structure. Similarly lower the cost of debt higher should be the debt. to obtain optimal capital structure.
2. Cost of Equity: Higher cost of equity would cause the company to issue debt .
3. Tax Rate: Higher tax rate causes higher interest tax shield. Hence company would issue debt to increase firm value.
4. Distress costs: If company is in distress then it should issue reduce debt and issue equity to reduce distress cost.
5. Flotation cost of new shares: Higher the flotation cost lower , higher is the cost of equity and company might opt fo higher debt.
6. Existing debt structure: If existing company has no debt then to increase firm value the company might use debt issue and in case the company is highly leverage it might issue shares to reduce leverage or risk.