All else equal, if a firm increases its leverage (either operating, financial, or both), its weighted average cost of capital probably will
A)increase because risk increases.
B)decrease because risk decreases.
C)increase because risk decreases.
D)remain about the same because risk does not change.
E)change somehow, but more information is needed to determine the direction.

Question

Quizplus · Accepted Answer

Increasing leverage increases the risk faced by the firm, which in turn increases the cost of capital. This is because creditors and investors demand a higher return to compensate for the increased risk.

All Else Equal, If a Firm Increases Its Leverage (Either