1 For a company does the feature of tax decuctability of int

1. For a company, does the feature of tax decuctability of interests give them higher cost of capital

2. What influences the debt amount a company can have: covenants in the debt instruments or the Principal/Agent relationship of the debt & the equity investors or the market risk, or is it all of these factors ?

3. Is it true that companies operating in Death Stage usually decrease their debt load.

Solution

1: Tax deductability of interest reduces cost of capital since there is a tax saving on interest paid.

2: The debt amount of a company is affected by: Covenants in debt instruments and market risk. Covenants in debt instruments restrict the uses of the debt and hence are a prime factor in debt udnertaking. MArket risk determines the expected returns of investors and hence the cost of debt. Thus it affects the amount of debt undertaken. There is no Principal/Agent relationship of the debt & the equity investorsas they are not agents of either.

3: Yes, companies in death stage know that the operations are going to end. Hence they try to pay off their debts so that there is no claim on the shareholders wealth post the company\'s operations end.