Issue equity over debt?

Many reasons. Maximum debt levels set by the board which cannot be exceeded, debt covenants and in some cases equity financing is cheaper, if your p/e is sky high , so it would make sense to sell.

Adding leverage onto a company comes with certain burdens that must be considered: 1) interest and principal payments. depending on the structure of the loan and rates applied, the company may default on the loan if economic times become harsh 2) pledging collateral, if the company goes into bankruptcy, you can lose your factories, cars, receivables, etc 3) covenants. this may require the company to maintain certain financial metrics, reporting measures and/or restrict it from acquiring capital elsewhere (simple examples) 4) debt can alter a company's credit profile and possibly deter future lenders from issuing capital

In addition to the above, you may just want to sell secondary shares to diversify your wealth.

~

Where the holy ***** cow have interviews already started ? pm me if you don't want to say please. here's an answer: First in equity you have to distinguish between the two main forms of considerations: Cash & Stock second the way you decide which is the optimal financing structure is through an accretion/dilution analysis. The intuition behind it is simple: The acquisition project must beat the cost of the capital employed for the financing of the acquisition. eg

Cash yields either 0(- inflation if you wanna sound like a smart ass) if it's just sitting there or ~3% if it's regularly invested in short term low risk liquid securities (hence why we call them cash equivalents) Let's assume your debt costs 6%/y Thus if your Acquisition is projected to yield 4%/y Full Cash will always be the superior option here although if for various reasons you can't deploy 100% of the cash required then 10% debt @6% + 90% @cash @3% results in a cost of capital of 3.3% thus you would still be beating your cost of capital by 0.7% At the end of the deal it's a compromise between what is optimal and what is do-able.

*If you get asked on what the yield of your own stock is, the answer is the inverse of your P/E Ratio.

and again, who the fuck has already started interviewing this is ridiculous.

1 - Very open-ended. Issuing equity will dilute Earnings somewhat, debt is cheaper, and issuing debt maximizes returns on equity. That being said, debt increases financial leverage, making the company more risky.

2 - Equity is more expensive.

3- Yes, the owners of the acquired company receive the stock in the acquirer. This happens in a "down" market when stocks are relatively cheap, as opposed to in a bull market when cash offers are more typical.

Appreciate your answer. Apologies for asking an open question, i thought it was going to be a short definitive answer.

In reference to question 2. Just one more thing, is equity more expensive because it is taxed?

But with Debt you also have to pay interest right. So it will depend how much the tax rate is compared to the interest rate.. and when you gotta pay it back? Or am i going down the wrong road here..

Equity is not always more expensive then debt. It is true that large, more stable, companies will have a higher cost of equity than cost of debt. However, for more risky companies debt will be too expensive, and equity will be cheaper. You see this most often amongst startups and tech companies, where large cash outlays are required today for unsure cash inflows in the future.

I assume you're referring to a company raising capital via an equity offering, and the answer is no. Equity infusions into a company are not taxed. For your accounting knowledge, the journal entry is simply a debit to cash and a credit to stockholders equity (most often hitting the common stock and additional paid-in capital accounts). No income statement accounts are affected here. Equity financing is more expensive because (among other things) it dilutes equity ownership of the company.

in_it,

taxes are one reason. Interest is tax deductible. So your cost of debt is your interest payment * (1 - tax rate). So, for example if your interest payments are $10 with a 40% tax rate, your cost of debt is only $6. You pay out $10, but save $4 in taxes.

Additionally, debt is often secured by assets, which brings the risk to the bank down and, therefore, lowers the payments.

There are other concepts here as well, i just gave a few easy examples off the top of my head. If you study up on the WACC (which you should know well before you start working anyways) you'll be a little more familiar with this stuff.

mschutzy,

great point. I've never really thought about that, but will def. use it in upcoming interviews.

in_it,

no need to apologize for the open question. I was merely saying that as to point out that when the interviewer asks you a question like this, they're trying to get a feel for your corpfin knowledge. It's open-ended on your behalf, so just don't say something too far off and say ANYTHING knowledgeable about the topic that you know.

there's some good information above, but one thing needs to be clarified: debt is always less expensive than equity because (1) debt is senior to equity in the capital structure and (2) debt has the tax shield. just because it doesn't make sense to raise debt for a startup, for example (as was mentioned above), it doesn't change these facts.

just look up cost of capital for the easy answer.