Question

The key issue in the whole capital structure discussion is whether a firm can affect its total valuation and its cost of capital by changing its financing mix?

Answer 1

When a small firm needs a surge of financial capital for expansion, issuing stock is generally preferable to borrowing. It allows the firm to raise money without incurring debt or interest payments, while also sharing ownership and responsibility with shareholders.

Step-by-step explanation:

When a small firm needs a surge of financial capital to carry out a major expansion, it is generally preferable to raise the funds by issuing stock rather than borrowing. By issuing stock, the firm is able to raise money without incurring debt or interest payments.

It also allows the firm to share ownership and responsibility with shareholders, which can provide additional support and expertise for the expansion. On the other hand, borrowing money through loans or bonds would require the firm to make scheduled interest payments, regardless of its income, and may limit its control over operations.