a) You lower your WACC without impacting the cost of equity
All of the following are arguments for using leverage, except You lower your WACC without impacting the cost of equity.
It is important to remember that the market value of the firm rises as the WACC decreases, as demonstrated by the following straightforward example: when the WACC is 15%, the market value of the company is 667; when the WACC drops to 10%, the market value of the company rises to 1,000.
A weighted average of the cost of equity and the after-tax cost of debt is known as WACC. WACC is lower than cost of equity because after-tax cost of debt is lower than cost of equity. In the event when the company has 100% equity capital, WACC can be equal to cost of equity.
The WACC is influenced by a change in capital structure, assuming that the cost of debt is not equal to the cost of equity capital. Since increasing equity financing frequently results in higher WACC, equity costs are typically higher than debt costs.
As a result, the proposal to finance a larger percentage of the project with debt will reduce the WACC while also increasing the return on equity (ROE).
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