Debt changes the cost of capital because it changes:

Name: Debt changes the cost of capital because it changes:
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Debt changes the cost of capital due to the tax shield from debt financing (interest payments on debt are tax-deductible, reducing the company's tax liability), flotation costs (the costs associated with issuing new securities), and bankruptcy costs (the costs associated with financial distress or bankruptcy, which increase as more debt is taken on).

Debt Changes the Cost of Capital Because It Changes