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    Cost of equity

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    In each of the theories of capital structure, the cost of equity rises as the amount of debt increases. So, why don't financial managers use as little debt as possible to keep the cost of equity down? After all, isn't the goal of the firm to maximize share value (and minimize shareholder costs)?

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    Solution Preview

    Normally, the cost of equity finance is higher than the cost debt finance, because the cost of equity involve a risk premium.

    Yes, the goal of the firm is to maximize shareholders' wealth, but this should be ...

    Solution Summary

    Theories of capital structure are generally applied in the solution.

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