What is generally viewed as a less expensive form of capital?

Debt is generally viewed as a less expensive form of capital compared to equity because of a few key reasons. Firstly, interest payments made on debt are usually tax-deductible, which effectively lowers the overall cost of borrowing. This tax shield makes debt financing more attractive since it reduces the company's taxable income and, subsequently, the tax burden.

Moreover, debt typically has a fixed repayment schedule, which allows companies to predict their financing costs over time. The cost associated with equity, on the other hand, often includes dividends and the expectation of capital gains for shareholders, which can lead to a higher overall cost of capital. Equity financing can also dilute existing ownership, whereas debt does not affect ownership structure, making it a preferred option for firms looking to minimize the impact on shareholders.

In many scenarios, especially in stable financial markets, firms can borrow at lower interest rates than the returns expected by equity investors, further solidifying debt's status as the more economical choice for capital.