Question

True or false. In DCF valuation, a company can increase its equity value by borrowing more...

True or false.

In DCF valuation, a company can increase its equity value by borrowing more money provided that the after-tax cost of debt exceeds the return on capital. (Assume all other inputs are fixed.

Homework Answers

Answer #2

Answer-

The statement is False.

In DCF valuation

The company cannot increase its equity value by borrowing more money, however company can increase its equity value by selling shares of stock, raising the company's revenues and decreasing its operating expenses.

The condition after-tax cost of debt exceeds the return on capital is not relevant as by borrowing more money the debt is increased but not the equity. By borrowing more money the cost of equity increases due to increase in leverage or debt but there is no increase in equity value.

answered by: anonymous
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