raising money by selling bonds, notes, or mortgages or borrowing directly from financial institutions. The presence of debt financing in a firm's capital structure provides FINANCIAL LEVERAGE, which tends to magnify the effects of increased operating profits on the stockholder's returns. Since debt is normally the cheapest form of longterm financing, due to the tax deductibility of interest, it is a desirable component of the firm's capital structure as long as the borrowed funds produce a return in excess of their cost. Also, during inflation, the company will be paying back the debt in cheaper dollars. However, too much debt can result in higher levels of FINANCIAL RISK in meeting the principal and satisfying interest  payments. Excessive debt will make it more difficult to raise funds and will increase the  COST OF CAPITAL.