A reduced cost of equity capital increases the firm's value

Question

Quizplus · Accepted Answer

When the cost of equity capital decreases, the discount rate used to evaluate the firm's future cash flows also decreases. As a result, the net present value (NPV) of existing projects increases, leading to higher valuations for the firm. Additionally, a lower cost of equity capital means that new projects with positive NPVs can be pursued with a higher likelihood of success, further increasing the firm's value. Therefore, both options (A and B) are correct in explaining how a reduced cost of equity capital increases the firm's value.

A Reduced Cost of Equity Capital Increases the Firm's Value