Explanation:
Under the Modigliani and Miller proposition (without taxes), increasing leverage raises the cost of equity but does not affect the firm's value or WACC. Therefore, the WACC remains unchanged. This is because the benefits of lower-cost debt are offset by the higher cost of equity, leaving the overall cost of capital unaffected.
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A company raises its debt from 20% to 60% of its capital structure. According to the Modigliani and Miller proposition (without taxes), the company's weighted average cost of capital (WACC) will:
A
decline.
B
remain unchanged.
C
rise.