If a firm finances with equity rather than with debt, it will bear no interest expense and thus yield greater net profits.

Question

Quizplus · Accepted Answer

When a firm finances with equity, it does not have to pay interest, as there is no debt. This means that the net profits will be higher since there is no interest expense to subtract from the revenues. However, it is important to consider that equity financing may dilute ownership and control of the firm, and shareholders may expect dividends or capital gains, which can affect the overall profitability of the firm.

If a Firm Finances with Equity Rather Than with Debt