Question

Within a firm, debt is always less expensive than equity. Why then would a firm also use equity to finance projects if debt is less expensive?

Answer 1

When a firm raises funds via equity the funds need not be
repaid.
Equity financing is a tool used by small and new businesses for
whom cash flow is uncertain.
Unlike debt financing,
when firms raise funds through equity financing, the firms are not obligated
to make dividend payments. In addition, a firm tries to maintain a good valuation
of the stock in the equity markets by performing well but does not owe anything to
the shareholders if the stock price falls.
Equity financing poses a greater risk to the investor than debt financing poses to the lender.
From the point of view of the firm, equity financing is more expensive but it does
not require fixed payments in the form of interest and principal.
A firm is obligated to make interest payments regardless of business revenue when it uses
debt financing. On the other hand, a firm is not obligated to make any payments when it
raises money through equity financing.