Debt OR Equity ???

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Permalink Reply by Sachidanand (Sacha) Singh on February 8, 2010 at 11:50am

Case for debt: cheaper funds, tax deductible servicing and thus higher return to shareholders;
Case against: higher risks, keeping debt capacity intact is akin to having a real option to expand

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Permalink Reply by Anu Sirohi on February 8, 2010 at 11:50am

The three important things a company will look at:
1. Domestic real activity
2. Cost differential b/w markets from where the company will raise funds
3. Credit condition : liquidity in the market

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Permalink Reply by Sachidanand (Sacha) Singh on February 9, 2010 at 8:26am

This might interest you - extracted from CBO paper on Taxing Capital Income and Approaches to Reform. The difference between equity financed and debt financed is a whopping 42.5% (last line). Effective tax rate on debt financed activities of corporates is -6.4%!!(The effective tax rate on debt-financed corporate capital income is negative in part because accelerated depreciation and interest payments generate tax deductions in excess of taxable income, which leads to corporate tax refunds.)

These are of course for US businesses but for other countries (unless debt servicing is not tax deductible) the variations will be only in details.

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