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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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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 ...

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Carol Sargent, PhD
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  • MSc, University of Virginia
  • PhD, Georgia State University
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