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20 December, 22:02

What is your reaction to Harriet's suggestion of using the cost of debt only?

Is it a good idea or a bad idea?

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Answers (1)
  1. 21 December, 00:43
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    No, it is a bad idea to use only the cost of debt

    Explanation:

    Only using the cost of debt, is not a good idea because too much amount of borrowing could lose the confidence of the investors and it could lead to the uncertainty in the future cash flows.

    Suppliers might be worried regarding the financial situation and lead to the supply disruption. Though, the debt might save the tax expenses, which could lead to the negative cash flow.

    When the company does not have adequate amount of cash at hand, it could cause many disruptions of financial. WACC (Weighted Average Cost of Capital) rates need to be used as the capital costs as it weigh the used capital cost and the used debt.
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