As the debt-to-assets ratio rises,the WACC is reduced because the after-tax cost of debt is usually lower than the cost of equity.What limits the substitution of debt for equity in the capital structure is that as the debt-to-assets ratio rises,the costs of both components eventually increase.

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The debt-to-assets ratio indicates the proportion of a company's assets that are financed by debt. As this ratio increases, the weighted average cost of capital (WACC) can initially decrease because debt financing is often cheaper than equity financing due to tax deductibility of interest. However, there's a limit to substituting debt for equity because as the debt level increases, it raises the financial risk for the company. This increased risk leads to higher interest rates demanded by lenders and can also increase the cost of equity as equity holders demand higher returns for increased risk, eventually increasing the overall WACC.

As the Debt-To-Assets Ratio Rises,the WACC Is Reduced Because the After-Tax