According to traditional financial theory, the cost of capital curve is U-shaped over the range of debt-equity mixes.

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Traditional financial theory suggests that the cost of capital curve is U-shaped over the range of debt-equity mixes. As the proportion of debt increases, the cost of capital initially decreases due to the tax benefits associated with borrowing. However, beyond a certain point, the cost of debt (in terms of interest payments and potential bankruptcy costs) begins to outweigh the benefits, resulting in an increase in the overall cost of capital.

According to Traditional Financial Theory, the Cost of Capital Curve