Capital structure, debet verus equity

Should a company have more debt or more equity in its capital structure? Explain your answer. What are some limitations of utilizing debt versus equity in the capital structure?

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Solution Preview is an increase in the use of debt, there will be an increase in the riskiness of both the debt and the equity, and these increases in component costs might offset the effects of the change in the weights and leave the WACC unchanged or even higher. In addition, since interest rates and tax rates cannot be controlled by the firm, having more debt in a company's capital structure will strike the company with an unexpected high cost of debt, leading to higher cost of capital. This is because when interest rates in the economy rise, the cost of debt increases because the firm will have to pay bondholders more when ...