for a project, why would a company choose to use debt over cash to finance a new project even though they have enough cash on hand.
My answer so far: 1) debt magnifies returns 2) Company might want to have more cash on hand just in case
| +220 | UBS Accused of Favoring H-1B Workers While Cutting U.S.-Born Employees | 53 | 55m |
| +116 | ONLY THESE BANKS OR YOU STRUCK OUT | 34 | 3h |
| +110 | IB Energy Drink Tier List / Ranking | 73 | 2h |
| +91 | PJT M&A Group Selection 2026 | 14 | 1d |
| +56 | Firm Thinks I'm Lying About Offer | 18 | 21h |
| +51 | Feedback for internship first desk at IBD BB - personal fit, "don't be too confident" | 29 | 1d |
| +33 | Stay at Weak Dealflow Team or Lateral? | 10 | 7h |
| +32 | Indiana University Fraternity Pipelines | 16 | 1h |
| +30 | Does BofA still pay its associates rat pellets? | 15 | 1d |
| +30 | Rogo AI | 10 | 3h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Debt is very cheap right now as well as offer a tax shield from the interest write offs. By using cash, they are adjusting their operational leverage which means they may not have enough cash to sustain business operations should something happen to the company that would reduce cash flows. ex. O&G company experiencing a down cycle in the price of oil
Also, by using debt it increases their leverage which may allow the company to grow at a faster rate vs. just using cash while not bringing the company to an unhealthy level of debt.
Think about buying a rental property with cash, your returns are going to be a lot lower vs. if you used a mortgage that you could easily support with the rent payments and your day-to-day job income should something happen.
How does the tax shield play into this? I understand debt is tax deductible, but even with the deductions, cash will still be cheaper than debt right? Or is that statement not always true?
Tax shield effectively reduces the cost of debt. However, I think where your getting confused is the idea that you need to attribute a 'cost' to cash. Even though your not paying interest on it, there is an opportunity cost to holding cash in your bank account. For example, if you had debt at 5% you could realize an immediate ~5% return on your cash by paying off the debt.
Say mortgage rates are 3% and after tax cost of 2.5%, your rental property earns 10% cash-on-cash it makes sense to use the cheap cost of debt and use your cash to fund other projects where you can earn higher rates of return above the 2.5%.
Isn't the cost of cash the potential you could earn on cash interest? Like a savings account for corporations (not sure if that exists) My question is, does the debt tax shield ever reduce the cost of debt below the cost of cash?
Voluptas non similique quidem est voluptas odio eaque. Quod eaque ut sed fugiat. Enim laudantium animi illum officia sunt quidem vel. Dolor ea quis quia sequi qui iusto aut sit. Consequatur architecto a ut veniam.
Repellat voluptates magni et in sit numquam animi. Recusandae nobis architecto sed voluptas molestiae maxime qui amet.
Et dolorem corrupti delectus explicabo asperiores est magni sunt. Aut odio in earum amet.
Voluptatem exercitationem enim dolores reprehenderit. Ut assumenda laboriosam recusandae sunt atque et atque. Fuga est sed accusantium. Veniam vero ea modi magni aut est.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...