A firm uses 20% Debt and 80% Equity in its capital structure. Beta for the equity of the firm in this regard is 1.5. If the same firm increases its Debt financing to 80%, consider these questions:

1. What is the Beta of the firm now: greater than 1.5, 1.5, or less than 1.5?

1. Would the cost of debt capital likely rise as Debt levels rise in the capital structure? Why or why not?

1. What happens in your opinion to the overall WACC for the firm as the firm uses a reasonable amount of debt financing? What is the firm uses very little debt? What if the firm uses a lot of debt?