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Mr. Brown, CFO of Firm Crown, gives a briefing to the board of directors. He shows that the required rate of return to debt is
Mr. Brown, CFO of Firm Crown, gives a briefing to the board of directors. He shows that the required rate of return to debt is 5% while the required rate of return on equity is 10 percent. He states As the required rate of return on debt is lower than the required rate of return on equity, an increase in the weight of debt in the capital structure through debt issuance will decrease the WACC of the company. State two reasons why his conclusion is not necessarily true even in the presence of tax benefits of debt.
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