13.7 Jo Ann's boss is wrong. The ability to borrow at 8% does not mean that the cost of capital is 8%. The firm could not finance a stand-alone project with 8% debt. This analysis ignores the side effects of the borrowing, for example, that at the higher indebtedness of the firm the equity will be riskier and, therefore, the equityholders will demand a higher rate of return on their investment.