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Homework answers / question archive / Explain what happens to the company’s market value if the company increases the proportion of debt, keeping the total capital unchanged (by buying back some shares)
Explain what happens to the company’s market value if the company increases the proportion of debt, keeping the total capital unchanged (by buying back some shares).
Illustrate your answer by showing how the firm’s value changes if the WACC changes.
It is generally assumed that debt capital will have a lower cost than the equity capital because that capital will always have an element of interest tax detection project with them which will be lowering the overall cost of debt and it will in turn lower the overall weighted average cost of capital of the company which will help in maximizing the rate of return because the cost of capital has been lowered and it will also have the company in order to increase their overall value because of increase in the proportion of debt to the overall capital structure.
THE OVERALL VALUE OF THE COMPANY WILL BE INCREASING AS THE COMPANY IS INCREASING THE PROPORTION OF DEBT.
