A firm in a stable industry should use: a) a large amount of debt to lower the cost of capital....

Question:

A firm in a stable industry should use:

a) a large amount of debt to lower the cost of capital.

b) no debt at all.

c) preferred stock in place of debt.

d) a limited amount of debt to lower the cost of capital.

Capital:

In general, there are three main ways to raise capital: debt and equity. This is done through financial instruments like common stock, preferred stock, bonds and bank debt. Each one has is advantages and disadvantages depending on the performance, goals, needs and credit of the company.

Answer and Explanation:

The answer is: a) a large amount of debt to lower the cost of capital. The cost of debt is tax-deductible for companies, so it costs less than equity to raise capital. As a result, most companies in stable industries like to use a mix of debt and equity to lower the the cost of capital.


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Capital Structure & the Cost of Capital

from Finance 101: Principles of Finance

Chapter 15 / Lesson 1
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