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When a firm initially substitutes debt for equity financing what happens to the cost of capital and why?
Wiki User
∙ 12y ago
According to the balance sheet and the optimal capital structure
and the current balance sheet, when an organization makes substitutes the company's equity for financing
all of the cost for the capital is prone to decrease particularly when the
company's cost of their debt appears to be lower with the cost of the company's equity.
Wiki User
∙ 12y ago
When a firm substitutes debt for equity financing, the cost of capital generally decreases. This is because debt financing is typically cheaper than equity financing, as interest payments on debt are tax-deductible, while dividends on equity are not. By substituting debt for equity, the firm reduces its overall cost of capital and improves its financial position.
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