DCF & WACC
If debt is cheaper than equity, why doesn't a company finance itself entirely with debt to minimize WACC?
Model answer
Because cost of capital is not static as leverage rises. More debt increases financial risk: equity beta and the cost of equity climb, the credit spread and cost of debt rise, and…
The full, human-reviewed answer is in the bank.
Sign up free and Daily 10 serves you 10 questions a day from all 1,500+ — or go Pro for unlimited reps.
More from DCF & WACC
- Walk me through a DCF.
- Why do you use unlevered free cash flow in a DCF and how do you calculate it?
- What is WACC and how do you calculate it?
- What are the two ways to calculate terminal value, and how do they differ?
- What discount rate do you use if you're discounting levered free cash flow?
- Two identical companies, one has more debt. Which has the higher WACC?