According to the material, if capital markets are cheap, what financing strategy is favored to deploy cash?

• A. Raise debt to lever the capital structure and pursue buybacks, dividends, or acquisitions
• B. Issue equity to fund everything
• C. Hold cash and avoid leverage
• D. Reinvest only in capex

Answer: (A)

When capital markets are cheap, debt is inexpensive and the cost of financing is low enough that using leverage can boost returns. The idea is to deploy cash by borrowing at low rates to support value-creating actions, rather than sitting on cash or diluting ownership with new equity. Using cheap debt to fund buybacks, dividends, or acquisitions can lift earnings per share and ROE, because the returns on these actions can exceed the interest cost and the tax shield on debt adds further value.

Holding cash or avoiding leverage misses this opportunity to amplify returns with favorable financing. Issuing equity to fund everything is less attractive when debt is cheap, since equity issuance can dilute ownership and be more costly to the firm in terms of dilution and opportunity cost. Reinvesting only in capex ignores other high-return uses of capital that leverage can unlock.