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Advantages and Disadvantages of Cost of Capital

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Assume that you are the CEO of a medium size company in the U.S. Your company is contemplating raising capital by selling debt securities and equity securities. Discuss the advantages and disadvantages if any associated with this plan.

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ADVANTAGES OF DEBT COMPARED TO EQUITY
- Because the lender does not have a claim to equity in the business, debt does not dilute the owner's ownership interest in the company.
- A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth.
- Except in the case of variable rate loans, principal and ...

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