Christopher William, president of William Industries which produces widgets, has hired you to determine its cost of debt and the cost of equity capital.The stock currently sells for $25 per share and the dividend will be $5.Christopher argues that it will cost us $5 per share to use the stockholders money this year therefore the cost of equity is equal to 20%.Furthermore, Christopher believes that the cost of debt is 25%. This is based upon the most recent financial statements which show that William Industries has total liabilities of $10 million and will face total interest expenses for the year of $2.5 million.Christopher argues that the company should increase its use of equity financing because debt costs 25% while equity only costs 20% and thus equity is cheaper.Is Christopher’s analysis of the cost of equity, debt, and decision to increase the use of equity financing over debt financing accurate?
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