In the Modigliani Miller perfect world with no taxes, if we assume that the effect of adding debt to a firm's capital structure is exactly balanced by an increase in the cost of equity as more debt is added, what is the effect of increased debt usage on the weighted average cost of capital (WACC)?
WACC increases continuously as leverage increases.
WACC first increases, then decreases as leverage increases.
WACC decreases continually as leverage increases.
WACC remains constant as leverage increases.