For the question: draw the graph of cost of capital as you move from 100% equity to 100% debt, I have heard that the answer is that it looks like a smiley face.
However, I thought that cost of debt is always lower than cost of equity. Can anyone explain?
Thank you
| +160 | UBS Tech layoff | 52 | 1d |
| +149 | Analyst: Why is UBS IB doing worse than peers?, UBS CFO: No Comment | 24 | 2h |
| +146 | UBS’s M&A BANKERS ARE DOING TERRIBLY. $200M EXTRA IS BEING CUT | 31 | 5h |
| +60 | Leaked Interview Questions to Recruiting Services | 34 | 41m |
| +59 | Are target prospects getting dumber? | 27 | 4h |
| +58 | How do YOU manage networking requests? | 17 | 10h |
| +37 | Quitting After First 4 months | 12 | 1d |
| +34 | MBB Pay Raises | 26 | 1d |
| +19 | Career Crossroads | 2 | 2d |
| +17 | Rothschild UK - Mining & Healthcare 2026 | 5 | 3d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Debt is always cheaper than equity, however, two things are important here. 1 - your cost of debt goes up as you add more debt, driven by investors needing to be compensated for default risk on debt 2 - your cost of equity goes up with leverage (you have to unlever/relever beta at each new leverage)
Eventually, the tax benefits are outstripped by your increasing costs of debt/equity. Damodaran has a spreadsheet that uses iteration to calculate optimal D/E given a set of inputs on his site.
Ducimus enim commodi molestias nostrum quis omnis. Dolor optio dolor libero numquam vitae sint. Tempora doloremque dolorum doloremque qui. Corporis ex ut ipsa.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...