Is debt easier to price compared to equities? Discuss using your knowledge in business finance.

Expert Solution

Ans ) Debt vs Equity decisions

	High	low
Flotation cost	issue debt	issue equity
Interest rates	issue equity	issue debt
Tax rate	issue equity	issue debt
Earnings volatility	issue equity	issue debt
Business growth	issue equity	issue debt
% debt in capital structure	issue equity	issue debt

Conditions. Debt. Equity

Management influence	None . unless there were especially agreed condition	common stock holder's have voting right
Repayment	Debt has maturity date	Stock has no maturity date
Yearly obligation	Payment on interest	Not legally liable to pay dividend
Tax benefits	interest is tax deductible	dividend are not tax deductible .

On an average we can say that debt are cheaper than equity because it is tax deductible .one can decide the appropriate rate if interest in comparison to equity because risk perception of equity change with time or with more use of Debt.

Inshort both have pron and cons one must take care there advantages and disadvantages while framing capital structure.

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jeff jeffy answered 1 year ago

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