Cost related issue of debt, Financial Accounting

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Q. Cost related issue of debt?

Debt is cheaper in comparison of equity because debt is less risky from an investor point of view. This is for the reason that it is often secured by either a fixed or floating charge on company assets and ranks above equity on liquidation and because of the statutory requirement to pay interest. Debt is as well cheaper than equity because interest is an allowable deduction in calculating taxable profit. This is referred to as the tax effectiveness of debt.


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