Debt increases risk of bankruptcy Causes pre-tax cost of debt, rd, to increase Adding debt increase percent of firm financed with low-cost debt (wd) and decreases percent financed with high-cost equity (ws) Net effect on WACC = uncertain.
Debt increases risk of bankruptcyCauses pre-tax cost of debt, rd, to increaseAdding debt increase percent of firm financed with low-cost debt (wd) and decreases percent financed with high-cost equity (ws)Net effect on WACC = uncertain.