All else equal, which of the following statements is (are)true?

Question

Quizplus · Accepted Answer

Lower cost of capital means that the firm is able to invest and grow more profitable projects. This will make the firm more valuable in the long run. A is false because increased risk of equity causes its cost of capital to increase, but it doesn't necessarily decrease the value of equity or debt. C is false because the P/E ratio doesn't determine the value of the firm; it only shows how the market values the earnings of the firm. Statement A is partially true, as increasing debt does increase the risk of equity, but it does not necessarily cause a decrease in the value of both debt and equity. Statement C is false, as a high P/E ratio indicates that investors are willing to pay a higher price for a given level of earnings, but it doesn't necessarily mean that the firm has a higher value. Statement B is true, as a lower cost of capital means that the firm can generate higher profits on its investments, which leads to higher market value.

All Else Equal, Which of the Following Statements Is (Are)true