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    Viable junk bond market means higher leverage is ok?

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    Because the weighted average given in Equation (17.4) in your text is always a correct measure of a required return, why do firms not create securities to finance each project and offer them in the capital market in order to accurately determine the required return for the project

    The development of the new issue junk bond market had important implications for capital structure choice. The existence of a viable junk bond market means that firms can comfortably maintain higher degrees of leverage than they could prior to the development of this market. Do you agree or disagree? Justify your answer.

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    Solution Preview

    Because the weighted average given in Equation (17.4) in your text is always a correct measure of a required return, why do firms not create securities to finance each project and offer them in the capital market in order to accurately determine the required return for the project

    While the weighted average cost of capital can be "accurate",? the relevant measure for a particular project is the "incremental"? cost ...

    Solution Summary

    Four paragraphs guide you on this, indicating the pros and cons.

    $2.19

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