There are two companies with identical financial profiles, but one has debt and one does not, which one would have a higher WACC?

This is a tough one. As a blanket rule, debt is cheaper than equity. This is due to three reasons:

Debt is senior to equity in a company’s capital structure, since debt holders are paid first in a liquidation event

Interest rates are usually lower than CoE rates

Interest on debt reduces taxable income. This is why we multiply the CoD by (1 - Tax Rate) to account for the savings in taxes from debt

So, the simple answer is that the one with debt would have a lower WACC due to debt being cheaper. But, as with everything in finance, there is a caveat. If a company becomes over-levered or close to it, interest rates will rise dramatically.

Credit cards are a nice way to conceptualize this. Let’s say that all of a company’s debt was on credit cards (obviously not true). Let’s also assume the rate on the credit card is lower than the company’s CoE. Two common reasons for credit card companies to raise your APR are if you a) make late payments and b) have a high credit card balance. So, if a company made late payments or held high balances, their APR would be raised. This same concept applies to how a company could have their interest rates on debt raised.