Modigliani–Miller without and with taxes: how leverage moves the cost of equity, the WACC and the value of the firm.
Modigliani and Miller showed that, without taxes and frictions, a firm's value does not depend on how it is financed. This tool shows how the cost of equity rises with leverage, how WACC stays flat without taxes, and how the interest tax shield lowers WACC and adds value once corporate taxes are introduced.
More debt makes the remaining equity riskier, because shareholders bear the business risk on a smaller base. Their required return rises exactly enough to keep WACC unchanged in the no-tax case.
The tax saving from deducting interest payments. With corporate taxes it makes debt financing cheaper and adds its present value to the firm.