How does increasing interest rates generally affect a company's cost of capital?

Increasing interest rates generally leads to a higher cost of capital for companies. This is primarily because the cost of debt, which is a significant component of the overall cost of capital, rises when interest rates increase. Lenders require a higher return for the increased risk associated with lending in a higher rate environment, thus raising the interest expense on any new debt that a company may issue or refinance.

Furthermore, a higher cost of debt can also spill over into the cost of equity capital, as investors may demand higher returns to compensate for the increased interest rates that affect the overall economic environment. As such, when calculating the weighted average cost of capital (WACC), both the cost of debt and equity could see increases, leading to an overall increase in the company's cost of capital.

This reflects the relationship between borrowing costs and interest rates, making it clear why increasing rates typically lead to a rise in capital costs overall.