If a firm decreases leverage (debt), what is the likely impact on the firm’s WACC?

Expert Solution

The firm's WACC increases if a firm decreases its leverage (debt). WACC is given by the following formula:

The weight shifts from debt to equity. Equity cost of capital is higher than debt cost of capital (re > rd). So, now there is more weight to the higher cost of capital. So, WACC increases with decrease in debt.

jeff jeffy answered 2 years ago

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