S1. Although the exact relationship between a firm's degree of financial leverage and its beta is difficult to estimate, it has been shown both theoretically and empirically that a firm's beta...

S1. Although the exact relationship between a firm's degree of financial leverage and its beta is difficult to estimate, it has been shown both theoretically and empirically that a firm's beta increases with its degree of financial leverage.

S2. As the debt ratio rises, the WACC is reduced because the after-tax cost of debt is usually lower than the cost of equity. What limits the substitution of debt for equity in the capital structure is that as the debt ratio rises the costs of both components eventually increase.