The Weighted Average Cost of Capital (WACC) Declines as More

question 2

True/False

The weighted average cost of capital (WACC) declines as more of the lowest cost component is added.What limits a firm from using nearly all debt is that as the debt ratio rises, the absolute interest expense gets very large.The
large interest expense reduces income and results in a debt ratio limit even though the WACC continues to decline.

---

Definitions:

Unlevered Cost

The cost of capital that a company faces before taking into account the effects of debt financing.

Pre-Tax Cost

The expense or cost that a company incurs before adjusting for taxes.

Total Equity

Total equity refers to the amount of owner's interest in a company, calculated as the difference between total assets and total liabilities.

Unlevered Rate

The unlevered rate refers to the return on an investment or the cost of capital without considering the impact of financial leverage, representing the risk of an investment independent of its capital structure.