Debt Capital Structure and Borrowing Costs

| November 13, 2015


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.


You may use the following reference: Parrino, R., Kidwell, D. S., Bates, T. (09/2014). Fundamentals of Corporate Finance, 3rd Edition. [VitalSource Bookshelf Online]. Retrieved from



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