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When should a company consider issuing debt instead of equity ??

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Question added by Ijaz Farooq - CPA ACCA Finalist , Accounts Manager , 3D Ortho Line Lab
Date Posted: 2018/07/03
Abid Ali
by Abid Ali , Accountant , STC

A company should always optimize its capital structure. If it has taxable income it can benefit from the tax shield of issuing debt. If the firm has immediately steady cash flows and is able to make their interest payments it may make sense to issue debt if it lowers the WACC. (weighted average cost of capital)

Faisal Jawad CMA
by Faisal Jawad CMA , Chief Accountant , Teltonika Middle East

When the rate of taxation are high, company should consider taking debt financing instead of equity issuance because the interest paid on debt creates a tax shield since it is tax deductible and hence saves a company huge cash outflows.

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