Figure shows that r D increases as the debt?equity ratio increases. In MM?s world r E also

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Figure shows that r_D increases as the debt?equity ratio increases. In MM?s world r_E also increases but at a declining rate. Explain why.

Redraw Figure, showing how r_D and change for increasingly high debt?equity ratios. Can r_D ever be higher than? Can r_E decline beyond a certain debt?equity ratio?

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Principles of Corporate Finance

ISBN: 978-0072869460

7th edition

Authors: Richard A. Brealey, Stewart C. Myers

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Question Posted: Jun 09, 2011 04:34 AM

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Figure shows that r D increases as the debt?equity ratio increases. In MM?s world r E also

Question:

Rates of return -rE (MM) TE (traditional) -rA (MM) TA (traditional) debt equity Traditionalists believe there is an optimal debt-equity ratio that minimizes rA alw

Step by Step Answer:

a As the debtequity ratio increases both the cost of debt capital and the cost o...View the full answer

Principles of Corporate Finance

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