If the cost of equity rises as the amount of debt increases why don't financial managers use as...

Question:

If the cost of equity rises as the amount of debt increases why don't financial managers use as little debt as possible to keep the cost of equity down?

Debt Issue:

A company issues debt for a number of reasons as it may be easily available or maybe cheap. The costs of equity rise with increasing debt due to distress cost increase as a result of debt.

Answer and Explanation:

The cost of debt is usually lower and also provides a tax shield to the company. Therefore, managers use debt as much as possible until they cannot use it or it increases the WACC. Managers on the other hand attempt to use debt as much as possible.


Learn more about this topic:

Loading...
Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
35K

Related to this Question

Explore our homework questions and answers library