Debt vs Equity
Likely a question with a simple answer but: If debt is cheaper than equity, then why do companies even issue equity at all and not just go with debt all of the time?
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Debt isn't actually cheaper than equity, it is priced fairly to reflect it's lower risk. Since debt holders have a higher claim on the capital structure (i.e. they get paid first), the investment is lower risk and therefore has a lower 'cost'. The only aspect of debt which actually is cheaper for companies is the tax benefit of interest payments (whereas dividend payments don't get the same treatment). All else equal, a company with debt in their capital structure will pay less than a company with no debt in their capital structure, and therefore pay less in taxes, increasing the enterprise value of the leveraged company. Hopefully that helps!
Also, some companies just don't have the cash flow to make the interest payments, so they can't raise much debt and are forced to the equity markets
This. Think of like a start-up company OP
When analysing cost, we want to look at the impact on the weighted cost of the two most common financing sources - debt and equity.
We get the benefit of a lower weighted cost by issuing debt up to a certain point.
Past this point, the cost of equity rises substantially as a result of the additional perceived risk to equity holders - increasing the weighted average.
Therefore, it really is a balancing act.
A key benefit of equity that is usually overlooked is its perpetual nature - equity has no refinancing risk.
This contrasts to debt which has tenure ranging from 1-30+ years (and subsequently creates refinancing events in given years).
With debt you HAVE to pay interest, but with equity you can pay dividends to shareholders but only if you want to. So debt increases the risk of bankruptcy
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