The Definitive Guide to Business Finance: What smart managers do with the numbers, Second Edition

Other management issues

By now it should be clear that you can put the cost of all financing options onto the same basis, line them up and, starting with the cheapest one, select those which give you the lowest cost financing package. Would that life were that simple. As you already know, too much debt can sink the ship. You need at least enough equity capital to weather the cash flow storms.

Another issue which I quietly omitted to mention in the previous paragraph is taxation. In general, a company’s tax bill is not affected by dividends, but it is reduced by debt interest payments (which are expensed). This does not affect the relative cost of debt instruments – they all have the same net tax effect. But it does impact on comparison of debt ...