The company’s CEO has stated if the company increases the amount of long term debt so the capital structure will be 60% debt and 40% equity, this will lower its WACC. Explain and defend why you agree or disagree.

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I disagree with the CEO’s statement that increasing long term debt will lower the company’s WACC. This is because while it is true that increasing debt can reduce the overall cost of capital, this comes at a cost of added risk to shareholders. With an increased level of leverage, there are more risks in terms of credit rating downgrade and potential default if interest rates or market conditions take a turn for the worse. Moreover, adding too much debt could also make the company less attractive for investors as their returns may not be sufficient to compensate for taking on additional risk.

Additionally, one should consider taxes when considering any change in capital structure as well because higher levels of debt will lead to more tax deductions which might partially offset the increase in cost due to borrowing money. All these factors need to be taken into consideration before making any changes which means it is highly unlikely that simply increasing long term debt would decrease WACC unless done carefully and after taking all externalities into account first.