You are the CFO of ABC Inc. ABC Inc operates in a newly independent country MMLand. In MMLand, there are no corporate taxes and capital markets operate perfectly. ABC has a market value of $100 million and is conservatively financed with only 5% leverage (in terms of market value). The cost of debt for ABC is 8% whereas the cost of equity is 12%. The CEO of ABC Inc. attends a workshop on project valuation at a well-known business school in Paris. In that workshop he is introduced to the concept to weighted average cost of capital (WACC). He comes back from the workshop all excited and tells you "The problem with our company is that our WACC is too high and hence we are rejecting a lot of good projects. We are using too much of equity in our capital structure, which by your own admission is expensive and is therefore pushing up our WACC. I want you to immediately explore the possibility of increasing the amount of debt in our capital structure; debt being cheaper should reduce our WACC." 

What advise will you offer the CEO?

Answer rating: 100% (QA)

Before making any changes it is advisable to consider several factors that may affect the financial ... View the full answer