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.
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 ...
Debt and equity are considered entities.