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I understand that as debt is added, the cost of equity rises

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I understand that as debt is added, the cost of equity rises. And as debt is added, initially, a firm?s WACC decreases. Value is also added. The Weighted Average Cost of Capital (WACC) is important as that is the benchmark rate to consider using for investment NPV calculations for projects with the same risk as that of the firm. Knowing all this, why does debt add value and how much debt should a firm have?

 

Paper#33811 | Written in 18-Jul-2015

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