When should a company issue debt instead of issuing equity?

Debt is preferable for the following reasons: A. It is less risky and cheaper source of financing B. It provide a tax shield C. It help us to maximize the return on invested capital ( financial leverage ).

Companies often use debt when constructing their capital structure which have following main features:

  - Lower cost

  - Financial leverage

  - Tax saving

  - Retain control

  

1) A company may raise debt capital to built its optimum capital structure.

 

2) debt is less risky than equity is in the event of a liquidation, debt holders would receive their capital repayment before share holders.

3) Debt is also cheaper than equity from a company’s perspective is because of the different corporate tax