Question

What source would you use if you had to determine the cost of your equity-financed firm...

What source would you use if you had to determine the cost of your equity-financed firm and were considering an investment of $500 million?

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Answer #1

if it is already an equity financed company, then I will be more inclined to use the debt capital in the overall capital structure because it will provide with the diversification benefit and it will also provide it with the lesser cost of interest.

So I will be including the debt capital because of following reasons-

A. it will decrease the overall cost of capital because interest payments on debt are tax deductible.

B. It will also lead to to less dilution of the control on part of equity share holders.

C. It will also be offering diversification benefits to the company in the capital structure

D. if the project is highly efficient to make a higher rate of return than the cost of debt will be lower and it will be providing a growth benefit.

E. it would be helping the company in the long run through expansion because debt capital is generally preferred for growth and expansion.

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