If the firm's actual debt ratio is below its target level, expansion capital should be raised by issuing equity in order to preserve the firm's borrowing capacity.

Question

Quizplus · Accepted Answer

If the firm's actual debt ratio is below its target level, it means there is still room for the firm to borrow more. In this case, it would be better to raise expansion capital by issuing more debt instead of equity, as it will allow the firm to use its borrowing capacity to finance growth. Issuing equity would dilute the ownership and control of existing shareholders without actually improving the firm's borrowing capacity.

If the Firm's Actual Debt Ratio Is Below Its Target