Cost of Debt vs Cost of Equity

• • Debt is Cheaper: Interest on debt is tax-deductible, reducing its effective cost.
• • Optimal Capital Structure:
  • Balance debt and equity to minimise WACC.
  • Excessive debt increases financial risk.
• • Risk-Return Tradeoff:
  • High debt-to-equity ratios raise financial distress costs.
  • Over-leverage can lead to bankruptcy.