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debt equity discussion

Consider the following statement by a financial manager: "Since we are financing our new manufacturing facility 100% with equity, we must evaluate it using a higher rate of return than we would if we financed a portion of the facility with debt." Do you agree? Why or why not? Be sure to fully explain the rationale behind your argument.

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My answer is "It depends.". Equity does not cost anything (if no dividends) or if there are dividends, usually less than paying interest on a loan. In this analysis, one would say that one should use a lower rate of return for ...

Solution Summary

Debt and equity are considered entities.

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