Question

would you recommend that a large corporation that is stuggling to have enough cash use debt or equity issuance as a source for external funding? and why?

Answer 1

Using debt issuance as a source of funding: debt can be used if lender ie financial creditors are willing to restrucutre the debt ie retire the debt that is maturing and issue newer debt with higher maturity. But if restructuring of debt is non agreeable by lenders, then the company the issuance of debt will add to the finanncial distress of the company. In such a case the firm will be overleveraged & in case the firm defaults on any of its debt obligations, then the financial creditors might begin insolvency proceedings agaist the company.

Using equity issuance as a source of funding: since the company is struggling with unavailability of adequate cash, the valuations of the firm (say price/earnings valuation) will be low as compared to comparable companies. It is quite possible, that the equity issuance will be at a steep discount rate & existing shareholders of the firm might not be very willing to dilute their stake at such low valuations. However, if shareholders are agreeable, then equity infusion is a good option as it will increase the cash position of the firm without adding any pressure on the interest costs.