A firm calculates its cost of debt and finds it to be 9.75%. It then calculates its cost of equity capital and finds it to be 16.25%. The firms chairman tells the chief financial officer that the firm should issue debt because it is cheaper than equity. How should the chief financial offi- cer respond to the chairman? (You may assume that the chief financial officers job is secure!)

The cost of debt is always less than the cost of equity because of the risk-return tradeoff

The Chairman is right

the chairman is wrong

it is always better to issue debt

A and B

A and C

A and D

B and C

B and D

C and D

All But A

All but B

All but C

All but D

all are true