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Risk free debt, and risk of firms equity

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What is wrong with the following argument: "If a firm issues debt that is risk free, because there is no possibility of default, the risk of the firm's equity does not change. Therefore, risk-free debt allows the firm to get the benefit of a low cost of capital of debt without raising its cost of capital of equity"?

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This solution discusses the following statement and gives reasons as to why the statement is wrong. "If a firm issues debt that is risk free, because there is no possibility of default, the risk of the firm's equity does not change. Therefore, risk-free debt allows the firm to get the benefit of a low cost of capital of debt without raising its cost of capital of equity"?

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Explain what is wrong with the following argument: "If a firm issues debt that is risk free, because there is no possibility of default, the risk of the firm's ...

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Edwin Sinclar, MBA
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  • MBA, Aspen University
  • Bachelor of Science , Berea College
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