Question

Discuss why corporate debt offerings are typically much more common than equity offerings and typically much larger as well.

Answer 1

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Answer:

Debt offerings are more common than equity y offerings, because of the following reasons:

• · First debt offerings are easier to issue and there is less floatation cost associated with debt than equity, hence firm prefers debt to funding over equity funding.
• · Second in debt firm does not have to dilute its owner ship but while issuing equity firm’s owner ship is diluted which is less preferable to the firm.
• · Third is that cost of debt is lower than cost of equity, hence company generally prefers to issue debt rather than equity so that its weighted average cost of capital is minimum.

As we have discussed that cost of debt is generally lower than cost of equity, this is because risk of investment is borne by equity investor not by the firm, whereas in case of debt investment risk of investment is borne by the company and investors enjoys rights to receive fixed returns on his investment.

Since risk of equity investors is high he returns expectations are also high from equity investment than debt investment, thus cost of equity for the firm is higher than the cost of debt.