14.4.1 The Lowest WACC

The preceding section makes it clear that with growing leverage WACC tends to decline. The question, therefore, arises as to whether the firm should have a very high degree of leverage. The question arises because a high degree of leverage raises the financial risk of the shareholders. It may also raise the financial risk of the bondholders insofar as in times of lean profits, it will be difficult for the firm to make interest payments. Thus, there will be a point beyond which leverage is not desirable. This point should be treated as the optimal capital structure.


WACC presents an approximating V-shape or a saucer-shape curve. The point at which the WACC is minimum represents ...

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