Since the component cost of debt is less than the component cost of equity, a shift in the composition of a firm's capital structure towards debt will always reduce a firm's cost of capital.

Question

Quizplus · Accepted Answer

While the cost of debt is typically lower than the cost of equity, increasing debt also increases financial risk, which can lead to a higher cost of equity and potentially higher overall cost of capital if the firm becomes overly leveraged.

Since the Component Cost of Debt Is Less Than the Component