Economics 13th Edition by James Gwartney, Richard Stroup, Russell Sobel, David Macpherson

Exercise 8

What is the opportunity cost of (a) borrowed funds and (b) equity capital? Under current tax law, firms can record as an expense the opportunity cost of borrowed funds, but not equity capital. How does this tax law affect the amount of debt the firm wants to incur, compared with the amount of money it raises by selling equity?