We have explore different capital structures. It is noted that initially, levera

Question

We have explore different capital structures. It is noted that initially, leverage can be the least expensive form of capital. However, if potential lenders feel a firm is overly leveraged, they may charge a punitive rate, or refuse to lend all together. This can be disastrous if a firm needs to refinance maturing debt. Unfortunately, the perception of what amount of leverage is excessive changes. What may seem like a reasonable amount of leverage today may be viewed as excessive tomorrow. If you were the CFO of an organization, what strategies would you employ to keep the cost of capital as low as possible while simultaneously minimizing the risk that the organization will be have difficulty refinancing debt in tight credit conditions.

Explanation / Answer

As the CEO of an organisation i would keep many things in mind not only the cost of capital but also other factors such as risk of non payment of external source of finance in tough credit conditions stc. Effective cost of capital of external debt is not the same as it is given because there is a tax benefit on cost of external debt . First the financing should be done from internal sources such as retained earnings , issue of shares etc becuase the cost of internal source is very low as compared to moving on to external source of financing

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