With the operating assets and investment policy held fixed, leverage does not change asset risk or the unlevered cost of capital. It increases equity risk and the required equity return when assets are riskier than debt. For moderate additional borrowing that leaves debt risk unchanged, the debt rate stays fixed and WACC remains rᵤ. At higher leverage debt may also become risky.

It is the market-value weighted average of the debt and equity costs and equals the unlevered operating return required for the same assets. A lower-cost debt share is offset by a higher required equity return as leverage rises.