Question

If the cost of debt is less than the cost of equity, should the firm use only debt for entire financing? Discuss.

Answer 1

The equity holder is not able to seize anything in the company. Another reason why the cost of debt is lower is that in case of bankruptcy, the debt is repaid in full prior to paying the equity holders of the company. If the company is making a loss, they would still have to pay the interest rate for the debt.