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Catherine Gottschalk
on Dec 01, 2024

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The use of cheaper debt by a firm will decrease the cost of equity because of the decreased risk as the weighted average cost of capital remains unchanged.

Weighted Average Cost

Reflects the average cost per unit of inventory, factoring in all costs of items purchased at various prices.

Cost of Equity

The return a firm theoretically pays to its equity investors, i.e., shareholders, to compensate for the risk they undertake.

Debt

A sum of money lent by one party to another, with the agreement it will be repaid later, typically with additional interest.

  • Learning about the relationship between financial leverage and a firm's exposure to financial risk.
  • Recognizing the benefits of debt financing in a firm's capital structure, including tax advantages.
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Camille MorgadoDec 03, 2024
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