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Anall-equity firm's stockholders currently require a 10 percent return on their investment.One of the directors of the company suggests that the firmcan lower its weighted

Anall-equity firm's stockholders currently require a 10 percent return on their investment.One of the directors of the company suggests that the firmcan lower its weighted average cost of capital by issuing debt since bondholders are only expected to require a 4 percent return.This implies that thevalue of the firm will increase, the director argues, becausethe "hurdle rate" on new investment will be lower.Comment on the director's arguments.

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