The financial manager of a large national firm was overheard making the following statement: “We try to use as much retained earnings as possible for investment purposes because there is no explicit cost to these funds, and this allows us to invest in relatively low-yielding projects that would not be feasible if we had to issue new common stock. We actually use retained earnings to invest in projects with yields below the coupon rate on our bonds.” Comment on the validity of this statement.
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