For most firms, the cost of capital decreases to a low point as the firm ________ debt financing. Beyond some optimal level, the cost of capital increases as the amount of debt ________.

Question

Quizplus · Accepted Answer

The cost of capital initially decreases as a firm increases debt financing due to the tax shield benefits of debt. However, beyond an optimal level of debt, the cost of capital increases due to higher financial risk and potential distress costs.

For Most Firms, the Cost of Capital Decreases to a Low