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

Question

Quizplus · Accepted Answer

A reduced cost of equity capital will increase the present value of the firm's cash flows from existing projects, leading to a revaluation of these cash flows. This will increase the firm's value. Additionally, a lower cost of equity capital will reduce the discount rate used to evaluate new projects, making more projects economically viable with positive net present values. This will result in increased investment, further increasing the firm's value. Therefore, both options A and B are correct, leading to answer choice C.

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