Question

As we have seen from the various components of WACC, there are some options that companies...

As we have seen from the various components of WACC, there are some options that companies have with respect to the percentage of debt and equity they use to fund projects. Based on your research (and you might want to find some other research to support your discussion), what are your thoughts on the right balance of debt and equity? What thoughts does a company have to consider with respect to this decision? What are the trade-offs by having more or less debt (or equity)?

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Answer #1

Since the cost of debt is comparitively lower than the cost of equity, debt involvement provide leaverage benefit to the company. since raising money through equity is costlier then raising money from debt due to following reasons-

1. Dillusion of rights of existing shareholders,

2. No tax benefit on payment of dividend,

3. Risk involved in equity investment

4.Floating cost ,which is result low cash receipt.

5.Rate of return expected by shareholders are higher which makes the source costly.

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