You work for the corporate treasurer of a publicly-owned corporation whose stock trades on the New York Stock Exchange. The firm needs to issue debt to raise capital for various projects, and its current debt is rated A. (The firm will only be issuing debt for these projects.) Decisions regarding the type of debt, the amount, the coupon rate, and the maturity have not been made.
The factors relevant to this decision are the current interest rate, economic outlook, the gains associated with the projects and the losses incurred by the debt. When we consider the total cost of the debt, in interest payments and loss of future flexibility, it should be less than the value of the projects. Since the decision to issue the debt has already been made, the company has probably already determined that issuing equity to fund the project is not feasible, or likely to cost more than the debt. Remember that interest on debt is tax deductible whereas cash flows on equity are not. For this reason companies in higher tax brackets will have more debt it their capital structures.
Because the costs associated with debt are higher when the ...
Factors surrounding the decision to issue debt to raise capital for various projects. Decisions regarding the type of debt, the amount, the coupon rate, and the maturity for a corporation.