A firm's cost of capital is not affected by the amount of leverage it uses.

Question

Quizplus · Accepted Answer

A firm's cost of capital is affected by the amount of leverage it uses, as the cost of debt and the cost of equity are both influenced by a company's level of leverage. As a company increases its use of debt financing, its cost of debt may increase due to higher perceived risk by lenders, while its cost of equity may increase due to the greater risk to shareholders associated with higher debt levels. This results in a higher overall cost of capital for the firm.

A Firm's Cost of Capital Is Not Affected by the Amount