The use of cheaper debt by a firm will decrease the cost of equity because of the decreased risk as the weighted average cost of capital remains unchanged.

Question

Quizplus · Accepted Answer

The use of cheaper debt by a firm may decrease the cost of debt, but it will not necessarily decrease the cost of equity. In fact, the cost of equity may increase if investors perceive that the increased debt increases the risk of the firm. The weighted average cost of capital may change depending on the proportion of debt and equity used by the firm.

The Use of Cheaper Debt by a Firm Will Decrease