RBC Capital Markets LLC Mock Interview
Practice 27 RBC Capital Markets interview questions covering deals, markets, and technical expertise.
Question 16 of 27
Can you think of a situation where raising debt over equity would be beneficial?
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Ryan Brunner has over ten years of experience recruiting, interviewing, and hiring candidates in the healthcare, public service, and private manufacturing/distribution industries.
Debt and equity have a very closely bonded relationship with each other in relation to a company's finances. In most situations, raising debt can create too high of an amount of pressure to meet payments versus raising equity. But, there are a few key situations where there is a distinct advantage in raising debt over equity and your interviewer will be looking to hear that you understand at least one of those advantages to be tax shielding, reducing cost of capital and not diluting the stake for investors.
Ryan Brunner has over ten years of experience recruiting, interviewing, and hiring candidates in the healthcare, public service, and private manufacturing/distribution industries.
"In the situations where I've advised an organization to increase debt, they've received a distinct advantage in a lower cost form of financing versus equity financing. In the end, this reduced the organization's WACC and came out to be a win for them."
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Raising debt over equity would be beneficial when a company does not want to dilute its EPS and debt is cheap relative to equity. For example, assume a company has a beta of 2.0, the risk-free rate is 2.0 %, and the expected market return is 6.5%. Then the cost of equity is 2.0% 2.0*(6.5%-2.0%) 11%. If the weighted average current yield on all outstanding debt instruments is 4.5%, then it may be beneficial to finance with debt rather than equity.
Marcie's Feedback
Awesome! Your answer is straightforward and clear. It's great that you've included an example with numbers, as this shows that you thoroughly understand this concept. Nice job!
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