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    I need your help in summarizing Debt Equity Mix

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    I need your help with the definition on Debt Equity Mix and I also need your help answering this questions:

    Why is debt a comparatively cheaper form of finance than equity?

    If debt is cheaper than equity, why do companies approach the equity markets?

    Can one minimize WACC when ther is a constraint on raising debt? If so, how?

    What are the effects of a corporate tax on the WACC of a business?

    Is minimizing WACC by having a larlely debt-based capital structure a high risk strategy, given the threat of bankruptcy in an overleveraged business? How do I explain this answer.

    What are the extraneous factors which impact the ability of a business to radically alter its debt-equity mix?

    Thnak you, your help is GREATLY appreciated.

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    Solution Preview

    Debt is cheaper for equity because of two reasons. First, because debtors have a prior claim if the company goes bankrupt, debt is safer than equity and therefore warrants investors a lower return; for the company, this translates into an interest rate that is lower than the expected total shareholder return on equity. Second, interest paid is tax deductible to the company; and a lower tax bill effectively creates cash. Because the cost of equity is not explicitly displayed on the income statement whereas the cost of ...