James KwakJul 22, 2015
More Misinformation about Banking Regulation
James Kwak
152
Actually, Jeff M, that isn’t true. Equity has a higher required return than debt, but as the equity percentage increases, both the required return on equity and the required return on debt both decrease, because both become less risky. Modigliani-Miller says the two effects exactly cancel out (unless one of the assumptions is not valid). So more equity does not mean a higher cost of capital.