Could you please tell me why debt is cheaper to raise finance than equity? And the costs that are involved if we choose equity finance that makes it an expensive way to raise finance?
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Debt cheapter tham Equity
4y ago#1It would seem that you have not been watching my lectures because I spend time explaining exactly this point!!
Debt is cheaper than equity for two reasons. Firstly, debt lenders require a lower return that equity because it is a less risky investment. Secondly, debt interest is tax allowable to the company whereas dividends are not tax allowable. This makes the after-tax cost of debt even lower.
I have now watched your lecture. Thanks for that
Could you please also state the costs that are involved in raising equity shares such as transaction cost, issue cost, etc?
4y ago#3I do discuss issue costs in my lectures working through Chapters 11 and of our free notes.
Transaction costs are not relevant to the company. They are the costs charged by the dealers when shareholders or debt holders buy or sell on the stock exchange shares/debt that are already in issue.
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