Question

The cost of debt, rd, is generally less than the cost of equity, re, because debt is a less risky security. A naive application of the WACC formula may suggest that a firm could lower its cost of capital (thereby raising the NPV of its current and future investments) by using more debt and less equity in its capital structure. Give one reason why using more debt may not lower a firms WACC, even if rd < re.


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  • CreatedMay 13, 2015
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