Modigliani and Miller argue that - in perfect capital markets - the weighted average cost of capital
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Question:
Modigliani and Miller argue that - in perfect capital markets - the weighted average cost of capital (WACC) does not change when changing a firm's capital structure.
a) Describe your own words why this is the case. Why doesn't the WACC decrease if we add more debt, which is cheaper than equity?
b) Imagine Modigliani and Miller were wrong and WACC actually was to decrease by adding debt. How does this impact the firm's NPV of projects? How does that affect shareholder wealth?
Related Book For
Cost Management Measuring Monitoring And Motivating Performance
ISBN: 9781118168875
2nd Canadian Edition
Authors: Leslie G. Eldenburg, Susan Wolcott, Liang Hsuan Chen, Gail Cook
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