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    Cost of capital/ debt ratios/operation efficiency

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    A utility company is allowed to charge prices high enough to cover all costs, including its cost of capital. Public service commissions are supposed to take actions to stimulate companies to operate as efficiently as possible in order to keep costs, hence prices, as low as possible. Some time ago, AT&T's debt ratio was about 33 percent. Some people (Myron J. Gordon in particular) argued that a higher debt ratio would lower AT&T's cost of capital and permit it to charge lower rates for telephone service. Gordon thought an optimal debt ratio for AT&T was about 50 percent. Are these theories supported or refuted?

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    These theories are not true. A company's cost of capital is dependent on its assets and not on its debt structure. If AT&T increases ...

    Solution Summary

    The solution clearly explains why the theories presented in the question are true or not. The solution goes into a great amount of detail about the cost of capital theories and concisely explains why the theories are not true. Overall, an excellent response to the question.