As the operating leverage increases, the risk to bondholders increases and so the cost of issuing bonds will increase.
The higher the P-E ratio, the cheaper the cost for equity financing. Therefore, when the P-E ratio increases, the company will issue more equity instead of debt.
If the corporate income tax rate increases, the company will use more debt as the source of financing because the interest on the debt is tax deductible. The higher tax rate reduces the effective interest rate for debt because the interest is tax deductible.
When there is uncertainty about the future the company would prefer equity financing. This is because dividend payments are not required, but interest payments are required. Therefore, if the future is poor for the company and they issued equity, they will not need to make any interest payments. However, if they issued debt, they would still be required to make interest payments, even when the business is not doing well in the future.
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