The calculation of the after$-$tax cost of debt versus the cost of equity plays a major role in managing capital costs for a company. Knowing the difference between the cost of debt and the cost of equity would determine how you would manage the cost of capital within a company.

You are the CFO of a company that is considering issuing its first bond issue to the public.

You have been asked to present a few matters related to debt $($bond$)$ financing to the board of directors.

Please briefly explain to the board: $(1)$ the usual collateral position of bondholders $($lenders$)$ versus equity investors, $(2)$ why common stockholders can demand a higher rate of return than lenders, and $(3)$ why you would suggest debt $($or equity$)$ financing.