If the PE ratio is increasing, that means that the company is becoming a more attractive investment opportunity. Therefore, more people will want to buy the shares and the cost of equity will decrease. This means that the company is more likely to issue equity as the PE ratio increases.
Because the interest that is paid on debt is tax deductible, an increase in the tax rate may cause a firm to increase the debt in its capital structure. It would do this because the increased tax rate will decrease the after tax cost of debt to the company.
Increased uncertainty about the future would probably lead the company to issue more equity. If the company issued more debt they will have more fixed interest costs in the future which will increase the risks related to the uncertainty about the future.
An increase in the Federal Fund rate will decrease debt financing because the interest that will need to be paid on the debt will be higher because of the higher Fed rate.
|
