Answer No.

Egret Printing and Publishing Company, owned by the Belford brothers who possess extreme
conservative nature which was the outcome of the fact that their father had to struggle under a
crushing burden of debt during the Great Depression of 1930. It was mainly due to this that the
Belford brothers vowed never to get deeply into debt. However, Patrick Hill who was
responsible for managing the internal as well as the external financial operations of the
company has been trying to change the firm’s policy of not using any debt. He puts forward a
proposal to the Belford brothers in which he states that he would complete the current task of
carrying out a detailed analysis of four major capital investments using the existing capital
structure but lowering the cost of capital, by including long term debt in the capital structure.
He even discusses the issue with the company’s bank which then provides him with certain
information as to how much could the company borrow, at what rate of interest which in turn
would help Egret to lower the weighted average cost of capital.

Patrick Hill is somehow confident of the fact that he will be able to persuade the
Belford brothers to make use of some amount of debt in their financial operations which would
help the firm to lower the cost of capital. The decision of whether to accept or reject the
project totally depends upon the comparison between the cost of capital and the return of the
project .He considers the use of debt financing to be extremely beneficial for the projects and
he is sure that it will help the company to be able to generate more and better projects in the
coming years. However, he also seems to be a bit confused about the fact that whether he will
be able to persuade the Belford brothers to employ debt financing. Hence, in order to be able
to convince them completely, Patrick Hill needs to have strong and genuine support to his idea
about debt financing. He needs to support his idea by providing them with the advantages of
debt financing. Hill has estimated that the total amount of fund needed for the new project has
to come from the Belford brothers and also that if they do not make use of debt financing, the
Belford brothers would have to liquidate their personal security holdings. As the use of equity
results in higher cost of capital Mr. Hill will advise only those projects which have higher rate of
return than cost of capital, and thus are more risky.

Earlier when the company did not make use of debt, it could only invest in Projects A &
C, but if the company takes debt, it would increase the funds that would be available with the
company and which would further allow the company to invest in those projects that were not
feasible earlier. It is also stated that if the company has to make use of additional funds beyond
$1.5million, the Belford Brothers would have to liquidate their personal security and the
company would have to pay 21% as the cost of capital for this. But by making use of debt
financing the cost of capital would only be 18.3% and this would help in lowering the WACC
which in turn would improve the company’s current NPV.

Hence, this proves that the use of debt financing is beneficial to the company which
would help in lowering the cost of capital and improve the cash flows in the business. Use of
debt would increase the level of investments by $500,000 and this would further make it
possible for the company to invest in project D. Now the company would have a total of 2
million of investable fund which would allow the company to invest either in Project A, C and D
or Project B, C and D.