Investment Theory:

(Assume no corporate taxes unless noted otherwise)

In a world with no taxes, no transaction costs, and no costs of financial distress, are the following statements true, false, or uncertain? Explain your answers.

a. If a firm issues equity to repurchase some of its debt, the price per share of the firms stock will rise because the shares are less risky.

b. Moderate borrowing will not increase the required return on a firms equity.