When corporate taxes are considered,how does leverage affect the WACC?
A) An increase in leverage will be offset by a decrease in equity financing, thus leaving WACC unchanged.
B) Changes in leverage will affect the WACC only if the interest rate on debt changes.
C) Increased leverage will increase the WACC.
D) Increased leverage will decrease the WACC.

Question

Quizplus · Accepted Answer

Increased leverage decreases the WACC because interest on debt is tax-deductible, reducing the overall cost of capital.

When Corporate Taxes Are Considered,how Does Leverage Affect the WACC