When corporate taxes are considered, how does leverage affect the WACC?

Question

Quizplus · Accepted Answer

Increased leverage typically decreases the Weighted Average Cost of Capital (WACC) because debt financing is often cheaper than equity financing, primarily due to the tax deductibility of interest payments. This makes the overall cost of capital for a company lower as leverage increases, assuming the company does not become overly leveraged to the point where the cost of debt increases significantly due to higher risk of default.

When Corporate Taxes Are Considered, How Does Leverage Affect the WACC