Figure 152

Hypothetical Cost-of-Capital Schedules for an Industry

A U-shaped weighted-average cost of capital curve reflects, first, lower capital costs because of the tax benefits of debt financing and, second, increasing capital costs as bankruptcy risk increases for highly leveraged firms.

After tax

Hypothetical Cost-of-Capital Schedules for an Industry

A U-shaped weighted-average cost of capital curve reflects, first, lower capital costs because of the tax benefits of debt financing and, second, increasing capital costs as bankruptcy risk increases for highly leveraged firms.

After tax

Leverage (debt/assets: %)

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