Explain what is wrong with the following argument: If a firm issues debt that is risk free

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Explain what is wrong with the following argument: “If a firm issues debt that is risk free because there is no possibility of default, the risk of the firm’s equity does not change. Therefore, risk-free debt allows the firm to get the benefit of a low cost of capital of debt without raising its cost of capital of equity.”

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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Fundamentals of Corporate Finance

ISBN: 978-0321818171

2nd Canadian edition

Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford

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