Companies raise funds through debt capital (principally through bonds) or equity

Question

Companies raise funds through debt capital (principally through bonds) or equity (common stock). More than 15 years ago the CFO of Home Depot spoke at Nova (I cannot remember the exact date due to my age). He was asked the following question: "Why does HD not have any long term debt or much debt at all to speak of?" His answer: "because we like to sleep at night." Comment on debt and equity and the capital structure of a company. For example, is it wise to have no debt? Would the CFO's answer be acceptable if you were a shareholder? Companies raise funds through debt capital (principally through bonds) or equity (common stock). More than 15 years ago the CFO of Home Depot spoke at Nova (I cannot remember the exact date due to my age). He was asked the following question: "Why does HD not have any long term debt or much debt at all to speak of?" His answer: "because we like to sleep at night." Comment on debt and equity and the capital structure of a company. For example, is it wise to have no debt? Would the CFO's answer be acceptable if you were a shareholder? Companies raise funds through debt capital (principally through bonds) or equity (common stock). More than 15 years ago the CFO of Home Depot spoke at Nova (I cannot remember the exact date due to my age). He was asked the following question: "Why does HD not have any long term debt or much debt at all to speak of?" His answer: "because we like to sleep at night." Comment on debt and equity and the capital structure of a company. For example, is it wise to have no debt? Would the CFO's answer be acceptable if you were a shareholder?

Explanation / Answer

For a company cost of debt is lower than cost of equity, but it does not mean that they should take whole fund as debt. More debt means more obligations and the company heaving more debt would not be able to save its earnigs as it would spend in repaying the debts.

From the point of view of shareholder. a shareholder would not like to see his investment binded for debt. Becuase in case of wind up the shareholders would get anything remaining after payment to debt providers.

So it is not wise to have not debt but having excess debt is also bad idea.

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