Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Can you please make a argument for or against the exhibit? EXHIBIT 1 Thomas Henderson's Argument for Using More Debt The name of the game
Can you please make a argument for or against the exhibit?
EXHIBIT 1 Thomas Henderson's Argument for Using More Debt "The name of the game is to get our required return or hurdle rate as.l sible. I mean, if we can achieve a low hurdle rate we'll have more projects whose IRR exceeds this low rate. And what will happen to the value of our stock if we consistently implement projects whose return exceeds this hurdle rate? It will go up, of course, thereby benefiting our stockholders. Now suppose the cost of debt is 10 percent and the required return on equity is 20 percent. If (as an example) we use half debt and half equity, the hurdle rate would be 15 percent. But sup- pose we go easy on the equity and heavy on the debt; say we use 10 percent eq- uity and 90 percent debt. If my arithmetic is correct the hurdle rate is 11 percent The logic of this argument is overwhelming! Let's use as large a proportion of debt as possibleStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started