On its face, it would appear that equity would be the cheapest cost of funding. Looks can be deceiving, however. Equity is actually the most costly form of funding. A careful review of Exhibit 5.1 bears this out. The exhibit omits the average corporate borrowing rate because of the diversity of loan products. Nevertheless, the average borrowing rates for 1926 to 2002 are less than the average rates of return for large stocks and higher than the average rate of returns for long-term Treasury bills.
Exhibit 5.1 does not address the average rate of returns for small privately held companies. According to some studies, small privately held businesses have experienced an average rate of return in excess of 35 percent. These average rates of return are indicative of the minimum rate of return an investor will require, given the amount of risk in each of the aforementioned categories. Equity investment can be divided into two categories, public and nonpublic. As we can see from the exhibit, if equity is used to fund the project, the cost could actually be a great deal higher than if debt is used.
A public company is one whose securities are registered with the SEC. Accordingly, public companies must abide by a plethora of rules and regulations. In addition, all of the company's financial data and pertinent information, ...