Firms tend to issue more debt when internal funds are low.

Question

Quizplus · Accepted Answer

When a firm's internal funds are insufficient to finance its investments and operations, it may resort to issuing debt to raise the necessary funds. This is because issuing debt allows the firm to borrow money from external sources, which can help it to finance its activities and maintain its operations. Moreover, the interest payments on debt are tax-deductible, making it a cheaper source of financing compared to equity financing. Therefore, firms tend to issue more debt when they have low internal funds.

Firms Tend to Issue More Debt When Internal Funds Are