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    Determining: The Debt Equity Mox

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    I need your help with the following questions and can you help me with a detailed answer.

    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 there 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 largely debt-based capital structure a high risk strategy, given the threat of bankruptcy in an overleveraged business? How do i explain the answer?

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

    Can you help me with the meaning to abbreviations, if they are used.

    Thank you, your help is GREATLY appreciated.

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    Solution Preview

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

    In most countries interest payments on debt is tax deductible kd(1-T) . But equity is

    not and this is the reason why debt is thought of as 'cheaper' then equity.

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

    Debt is cheaper , but its also riskier then equity. If a company brokes up it doesn't owe anything to shareholders , but they have to pay their debt whatever happens. This is why companies generally ...

    $2.19

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