If the firm's actual debt-to-assets 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-to-assets ratio is below the target level, it means the firm has borrowing capacity available. In this case, it would be more appropriate to raise capital through debt financing rather than equity financing. Issuing equity would dilute the existing shareholders' ownership stake in the firm and may not be the best option for preserving the firm's borrowing capacity.

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