answer two finance discussion questions

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Answer the two questions which from a finance course following:

11.6 Debt and the Weighted-Average Cost of Capital.

Why do investors typically accept a lower risk-adjusted rate of return on debt capital than equity capital? Suppose a stable, financially healthy, profitable, tax-paying firm that has been financed with all equity now decides to add a reasonable amount of debt to its capital structure. What effect will the change in capital structure likely have on the firm’s weighted-average cost of capital?

12.6 Valuation When Free Cash Flows Are Negative.

Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will generate negative free cash flows for equity shareholders in each of the next five years. Can you use a free-cash- flows-based valuation approach when cash flows are negative? If so, explain how a free-cash-flows approach can produce positive valuations of firms when they are expected to generate negative free cash flows over the next five years.

Answer the two questions separately. Do not write in any essay format. Just one or two or more paragraphs for each questions. Prefer not using any references.


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