Firms weighted average cost of capital

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Reference no: EM13917462

Proposition I (with Corporate Taxes) Firm value increases with leverage VL = VU + TC B

Proposition II (with Corporate Taxes) Some of the increase in equity risk and return is offset by the interest tax shield 5.

Based on the second proposition, what should happen to a firm’s weighted average cost of capital as it increases the percentage of debt in its capital structure but remains below the optimal amount of debt? Explain why it happens.

Reference no: EM13917462

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