The cost of debt, rd, is generally less than the cost of equity, re, because debt is

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The cost of debt, rd, is generally less than the cost of equity, re, because debt is a less risky security. A naive application of the WACC formula may suggest that a firm could lower its cost of capital (thereby raising the NPV of its current and future investments) by using more debt and less equity in its capital structure. Give one reason why using more debt may not lower a firms WACC, even if rd < re.
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Introduction to Corporate Finance

ISBN: 978-0324657937

2nd edition

Authors: Scott B. Smart, William L Megginson

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