Interview Question

Interview

Can your cost of debt ever be greater than your cost of

  equity?
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Interview Answer

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0

Disclaimer: The interviewer didn't like my answer. Technically your cost of debt can't be higher than your cost of equity because equity takes on more risk in case of bankruptcy because it falls in the back of the line. However, if you are too highly leveraged then your cost of debt would get pushed really high because of lower credit rankings, frightened suppliers, and other potential bankruptcy costs. This would push your cost of equity higher as well. Therefore, your cost of equity would still be higher than the cost of debt at that point but the increase in both was due to taking on too much debt. I would argue then that the cost of debt was higher than the cost of equity.

Interview Candidate on Dec 7, 2013

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