(i) Explain what is wrong with the following argument: “If a firm issues debt that is risk free, because there is no possibility of default, the risk of the firm’s equity does not change. Therefore, risk-free debt allows the firm to get the benefit of a low cost of capital of debt without raising its cost of capital of equity.”
(ii) Suppose Visa Inc. (V) has no debt and an equity cost of capital of 9.2%. The average debt-tovalue ratio for the credit services industry is 13%. What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of 6%?
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