Here are the assumptions that Roseanne made and comments about their realism:
1.New debt would cost about the same as the yield on outstanding debt and would have the same rating. – Very likely if the ratings haven’t changed.
2. The firm would continue raising capital for future projects by using the same target proportions as determined by the book values of debt and equity – Although in reality firms don’t stick to the exact historical proportions of debt and equity, it can be argued that failure to do so would lead to higher future costs. It’s probably better to use current market value weights rather than book value proportions, however. Since prices of these securities and hence their weights have changed significantly.