Accredited In Business Valuation (ABV) Exam

What happens to WACC when a company increases its leverage (debt ratio), assuming no change in business risk?

WACC increases because equity becomes riskier as leverage rises WACC initially decreases due to the tax shield but may increase at high leverage due to financial distress costs WACC remains constant regardless of capital structure changes WACC decreases indefinitely as more debt is added

Correct Answer:

WACC initially decreases due to the tax shield but may increase at high leverage due to financial distress costs

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