Given taxes and bankruptcy costs exist,as financial increases,the weighted average cost of capital first decreases and then increases.

Question

Quizplus · Accepted Answer

When financial leverage is increased, the cost of equity decreases due to the tax shield effect, while the cost of debt remains constant. However, as financial leverage increases further, the risk of bankruptcy also increases, leading to higher bankruptcy costs and increasing the cost of equity. As a result, the weighted average cost of capital first decreases and then increases.

Given Taxes and Bankruptcy Costs Exist,as Financial Increases,the Weighted Average