Question

Portable Pet Care, a mobile veterinary service, wants to expand. After thoroughly reviewing the possibility of expansion, Portable Pet Care plans to offer a similar service in the Indianapolis metropolitan area as it does in its original Columbus, Ohio area. This will require a large capital expenditure. Due to the nature of this project, the firm will consider only equity financing.

Answer 1

FALSE

Step-by-step explanation:

Since it is stated in the scenario that this project will require a large capital expenditure due to the nature, the firm will consider NOT only equity financing but also DEBTS.

As a matter of fact loans (particularly fixed term loans) are a cheaper source of finance for long term projects that require huge initial investment because:

1. Interest on loans are tax deductible which effectively reduces the cost of capital, and explains why cost of debt is given by the formula kd(1-tax rate)

2. The interest rate stays the same for the loan's entire term as against dividends on equity that are expected to grow