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?
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.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Financial Accounting: Help and ReviewChapter 8 / Lesson 7