Printing Plans to Issue a $1,000 Par Value, 20-Year Noncallable

question 44

Multiple Choice

Printing plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually.The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 30.00%.By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?

• A)0.57%
• B)0.63%
• C)0.70%
• D)0.77%
• E)0.85%

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Definitions:

Equity Risk

The risk of loss associated with fluctuations in the stock market or the volatile performance of individual stocks.

Capital Structure Policy

A company's decisions and strategies regarding the mix of its financing sources (debt and equity) to fund its operations and growth.

Financial Risk

The likelihood of financial setbacks in an investment or business initiative.

Interest Tax Shield

Lowering income taxes through the deduction of debt interest payments from taxable earnings.