If the cost of capital of equity goes up and the cost of capital of debt...
If the cost of capital of equity goes up and the cost of capital of debt goes up, and the firm consists only of debt and equity, does the capital of the firm goes up?
Homework Answers
No, Capital of the firm goes down.
Cost of capital and Capital value is inversely related which means if cost of capital goes up then value of capital goes down and vice versa (if other factors remains unchanged).
In above case, cost of capital of equity goes up and cost of capital of debt goes up which means market value of equity and debt goes down thus, capital of the firm goes down.
Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.
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