The Barbie Company has an equal amount of low-risk projects, average-risk projects, and high-risk projects. Barbie estimates that the overall company's WACC is 12 percent. This is also the correct cost of capital for the company's average-risk projects. The company's CFO argues that, even though the company's projects have different risks, the cost of capital for each project should be the same because the company obtains its capital from the same sources. If the company follows the CFO's advice, what is likely to happen over time?
Also,
If the value of a previously all equity firm rises by $1.6 million as a result of a debt raising to buy back shares, what can be concluded about the size of the debt raising? Assume the firm's free cash flows are unaffected, that it is taxed at a 40% corporate rate and that capital markets are otherwise perfect.