The Weighted Average Cost of Capital Is Invariant to the Use

question 57

Essay

The weighted average cost of capital is invariant to the use of leverage under MM conditions of no taxes. Graph the relationship of the weighted average cost of capital and leverage; be sure to include the cost of equity and debt. Explain why this relationship holds.

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Definitions:

Pension Program

A retirement plan offered by an employer that provides a regular income to employees after they retire.

Paid Vacation

A period of time, often legally mandated, during which an employee is allowed to be away from work while still receiving pay.

Workers' Compensation

State programs that provide benefits to workers who suffer work-related injuries or illnesses, or to their survivors.

Employee Retirement Income Security Act

A federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.