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Increased use of debt, is likely to ________ of the firm provided that the cost of equity remains unaffected.

Solution

✅ Correct Option: 2

Debt is a cheaper source of finance than equity because lenders bear lower risk and interest is tax-deductible. Therefore, if the cost of equity remains unaffected, increased use of debt lowers the weighted average (overall) cost of capital of the firm and can increase its value.

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