Suppose Jack, president of Heart Limited has hired you to advise on the firm’s cost of capital. The company paid $1 million of dividends in the past year. Its market capitalization was $10 million. Based on his own analysis, Jack suggests that the company increases its use of equity financing, because “debt costs 12.5 percent, but equity only costs 10 percent; thus, equity is cheaper.” Appraise Jack’s statement.
Suppose Jack, president of Heart Limited has hired you to advise on the firm’s cost of capital. The company paid $1 million of dividends in the past year. Its market capitalization was $10 million. Based on his own analysis, Jack suggests that the company increases its use of equity financing, because “debt costs 12.5 percent, but equity only costs 10 percent; thus, equity is cheaper.” Appraise Jack’s statement.
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 1P
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Suppose Jack, president of Heart Limited has hired you to advise on the firm’s cost of capital.
The company paid $1 million of dividends in the past year. Its market capitalization was
$10 million. Based on his own analysis, Jack suggests that the company increases its use
of equity financing, because “debt costs 12.5 percent, but equity only costs 10 percent;
thus, equity is cheaper.” Appraise Jack’s statement.
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