Question Description
Christopher William, president of William Industrieswhich produces widgets, has hired you to determine its cost of debt and thecost of equity capital. The stock currently sells for $25 per share and thedividend will be $5. Christopher argues that it will cost us $5 per share touse the stockholders money this year, therefore, the cost of equity is equal to20%. Furthermore, Christopher believes that the cost of debt is 25%. This isbased upon the most recent financial statements which show that WilliamIndustries has total liabilities of $10 million and will face total interestexpenses for the year of $2.5 million. Christopher argues that the companyshould increase its use of equity financing because debt costs 25% while equityonly costs 20% and thus, equity is cheaper. Is Christopher’s analysis of thecost of equity, debt, and decision to increase the use of equity financing overdebt financing accurate? Defend your answers andcite your sources.
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