A firm calculates its cost of debt and finds it to be 9. It then calculates its cost of equity capital and finds it to be 16.

A firm calculates its cost of debt and finds it to be 9.75%. It then calculates its cost of equitycapital and finds it to be 16.25%. The firm’s chairman tells the chief financial officer that thefirm should issue debt because it is cheaper than equity. How should the chief financial officerrespond to the chairman? (You may assume that the chief financial officer’s job is secure!)