When considering acquisition costs, which financing option is generally less expensive?

Debt financing is generally considered less expensive when evaluating acquisition costs due to a number of factors. First, debt typically has lower interest rates compared to the cost of equity. Investors often expect a higher return on equity to compensate for the greater risk they take on, making equity financing more costly overall.

Additionally, interest payments on debt are tax-deductible, which can reduce the effective cost of borrowing for a company. This tax shield allows firms to minimize their overall expense when financing acquisitions through debt, making it a more favorable option in many scenarios.

Moreover, the obligation to repay debt is fixed over time, which allows for better forecasting of cash flows, whereas equity financing can create ongoing expectations from equity holders regarding returns and may dilute existing ownership stakes.

Thus, in general scenarios involving acquisition costs, debt financing offers a more cost-effective solution compared to other options such as equity, hybrid financing, or venture capital.