provide a short  answer to the following questions: 

a. Suppose that Firm A has a greater cost of equity capital than Firm B. It is necessarily true that Firm A also has a higher WACC? Why or why not? 

b. An investment banker approaches you and argues that equity is cheaper than debt because debt requires the firm to pay interest and principal payments, while with equity the firm can choose whether to pay dividends. Therefore, he says, your firm should take advantage of this and finance with equity. Do you agree? Why or why not? 

c. A friend from work says that "discount rates on equity are more than discount rates on debt. Thus, if a firm finances with 100% debt, its discount rate will be as low as possible and thus the value of the firm is maximized". Is he correct? Does financing with debt tickets rather than equity tickets increase the value of the firm? 

d. An investment banker argues that your firm should replace your long-term debt with short-term debt because short term interest rates are lower than the long- term rates. The lower rates will reduce your WACC and increase firm value. Is he correct? Why or why not?

Answer rating: 100% (QA)

a No its not necessarily true that Firm A also has a higher Weighted Average Cost of Capital WACC ju... View the full answer