Final answer:
Factors such as tax benefits, financial flexibility, and market signaling favor the issuance of debt. However, one must balance these against potential distress costs related to financial difficulties arising from excessive debt.
Step-by-step explanation:
When considering the factors that favor the issuance of debt in the financing decision of a firm, several aspects come to the forefront. Tax benefits are a major advantage, as the interest payments on debt can often be deducted from corporate income, thus lowering the effective tax rate. Additionally, issuing debt over equity can provide greater financial flexibility, because firms maintain full control over their business operations as they are not subject to shareholders in the same manner as when issuing equity. Firms must also consider market signaling, where the choice of financing can convey information to investors about the firm's prospects. However, it is important to weigh these advantages against potential distress costs, which pertain to costs associated with financial difficulties or bankruptcy risks associated with excessive leverage.