Since the expected rate of return on debt is less than the expected rate of return on equity, the weighted average cost of capital declines as more debt is issued.

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) initially declines as more debt is issued due to the tax shield on interest. However, beyond a certain point, the cost of debt and equity may increase due to higher financial risk, potentially increasing the WACC.

Since the Expected Rate of Return on Debt Is Less