What Are the Problems with Using Too Little Debt in the Capital

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The Answer is Too little debt results in a firm's paying higher taxes than it otherwise would. It also increases instances of "rent-seeking." For example, when entities who have the ability to affect the business operations negatively, such as key employees or large suppliers, believe that a firm has excess cash lying around, they will attempt to renegotiate terms to expropriate some of this cash for themselves. The use of debt reduces the amount of excess cash available to be expropriated. Moreover, if a firm uses very little debt, the markets may view this as a signal that management does not have the confidence that the firm can generate enough cash flow to service a lot of debt.

What Are the Problems with Using Too Little Debt in the Capital

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