Question: Presentation to the Board of Directors, The Pros and Con of Debt Financing
The calculation of after-tax cost of debt plays a role in managing capital costs. You have been asked to present a few matters related to Debt (Bond) financing to the Board of Directors.
Please briefly explain to the Board
1) the usual collateral position of Bondholders (Lenders) versus Equity investors,
2) why common stockholders can demand a higher rate of return than lenders, and
3) why you would suggest debt (or equity) financing.