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

Question

Quizplus · Accepted Answer

The cost of capital typically decreases as a firm increases its use of debt financing due to the tax benefits of debt. However, beyond a certain point, the cost of capital increases as the firm takes on more debt, due to the increased risk of default.

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