Use M&M propositions to provide your answers with explanations and/or calculations where applicable.

(a) Why is the following statement false or at least misleading?

In each of the theories of capital structure the cost of equity rises as the amount of debt increases. So why don't financial managers use as little debt as possible to keep the cost of equity down? After all, isn't the goal of the firm to maximize firm value and minimize shareholder costs?

(b) Explain why the weighted average cost of capital is invariant to the firm's debt-equity ratio in the absence of corporate taxes.