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Method of financing

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Due to large losses incurred in the past several years, a firm has $2 billion in tax-loss carryforwards. This means that the next $2 billion of the firm's income will be free from corporate income taxes. Security analysts estimate that it will take many years for the firm to generate $2 billion in earnings. The firm has a moderate amount of debt in its capital structure.
The firm's CEO is deciding whether to issue debt or equity in order to raise the funds needed to finance an upcoming project. Which method of financing would you recommend? Explain.

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Solution Summary

Identifies the method of financing to be used.

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It is better to issue equity. The interest to be paid on debt is to be deducted for calculating taxable income. Thus ...

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