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A company incorporates increasing amounts of debt finance into its capital structure, while leaving its operating risk unchanged. Assuming that a perfect capital market exists, with corporation tax (but without personal tax), which of the following correctly describes the effect on the company’s costs of capital and total market value?
I understand that this will result in higher cost of equity and lower WACC but how does this result in higher market value of the company?
A company incorporates increasing amounts of debt finance into its capital structure, while leaving its operating risk unchanged. Assuming that a perfect capital market exists, with corporation tax (but without personal tax), which of the following correctly describes the effect on the company’s costs of capital and total market value?
I understand that this will result in higher cost of equity and lower WACC but how does this result in higher market value of the company?
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