Hi, this is probably super easy but I was asked what is worth more, a company 100% financed by equity or one financed with debt.
I assumed that as debt costs less than equity then that yields to a lower wacc and a higher EV value. I know that Ke is affected by debt but I would assume it is always higher than Ke.
Interviewer said correct answer is 100% equity. Not sure if I understand why.
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A company financed by equity is worth more than one financed entirely by debt bc equity represents ownership in the company, debt represents borrowed funds that need to be repaid with interest. When a company is financed with equity, it doesn't have the burden of debt repayments and interest, which can lead to higher profits for shareholders. Also, equity investors share in the company's success through dividends and capital appreciation provide more potential for long-term growth and value creation.
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