Why the debt is the cheapest source of fund?

Answer 1

This answers must be tackled in two terms; the long and short term(s)

Short term

Debt is a loan borrowed from either banks or financial institutions.

this loan must be serviced with interest and later the payment of the principal.

Adv.

1) In some countries (examle Kenya ) interest is a tax free item,so its more cheaper bcoz it reduces tax burden.

2)When raising a detbt, the cost is more minimal coz one needs only the necessary books of a/cs(t,p and l) take to bank and present them to credit controller.

3) It takes shorter period to raise debt capital than other sources coz does not need alot of regulations eg share holder approval/capital markets.(appys in Kenya)

This wiil lead to promt investimentand ealy returns

4)debt can be borrowed from any institution either external or internal sources.

5)there are no devident payable if we finance bu debt