Question

Compare and contrast the costs and opportunity costs of equity financing with the cost of debt financing. If you were to interview a shareholder, what might they say to you about the presence of bondholders?

Answer 1

Company can raise capital by equity or debt.

1) Equity is considered more stable form of financing (no pressing need to repay fixed payments unlike debt). Thereby it helps long term stability of the firm.

2)But equity is dilutive for shareholding for investors unlike debt

3) Equity lacks the tax shield benefit that debt financing gets (interest expenses are tax deductible)

Shareholders may be ok with limited debt but will be more alarmed if the debt crosses limits (As per their perspective).