What impact does the use of Debt to finance a business have on that company's Weighted...

What impact does the use of Debt to finance a business have on that company's Weighted Average Cost of Capital and why?

Expert Solution

Use of debt capital will be reducing the overall weighted average cost of capital because debt capital will always be having a tax deduction element embedded to it.

Interest paid on the debt capital are always tax deductible in nature so the interest payable are adjusted with tax rate, will be lowering down the overall cost of debt attached to a business.

Use of debt capital will be helping the company in reducing the weighted average cost of capital because of tax deduction and it will also help the company in order to maximize its earnings due to lower cost of debt and it will also have an opportunity in order to maximize its rate of return over cost of capital.

Debt capital will always be having an interestinterest tax deduction and these will be leading to lowering down the cost of equity also so it will be overall helpful in order to lowering down the overall cost of capital of the company and increasing the growth rate through lower cost of capital.

jeff jeffy answered 2 years ago

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