Answer: Cost of equity

**Explanation:** - **Option A (WACC):** Incorrect. According to the Modigliani-Miller propositions, an increase in the debt-to-equity ratio either has no effect on the WACC (Proposition I) or decreases the WACC (Proposition II). The weighted average cost of capital remains constant as the capital structure changes. - **Option B (Cost of debt):** Incorrect. Under the assumptions of Modigliani-Miller Proposition I (without taxes), the cost of debt remains unaffected by changes in the debt-to-equity ratio. Even with taxes, the cost of equity increases more than the cost of debt when the debt-to-equity ratio rises. - **Option C (Cost of equity):** Correct. As the debt-to-equity ratio increases, the company's financial risk rises, leading to a higher cost of equity. Modigliani-Miller Proposition II states that the increase in the cost of equity must exactly offset the greater use of lower-cost debt, ensuring the WACC remains unchanged.

Author: LeetQuiz Editorial Team