Assume a Tax-Paying Firm Is Currently Financed with 50% Debt

question 66

Multiple Choice

Assume a tax-paying firm is currently financed with 50% debt and 50% equity. The after-tax cost of debt is 6% and the cost of equity is 12%. If the firm issues some 8% preferred stock at par, then the firm's WACC will:

• A) increase.
• B) decrease.
• C) either increase or decrease depending upon the amount of stock issued.
• D)not be affected.

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Definitions:

Metaphor

A figure of speech in which a word or phrase is applied to an object or action to which it is not literally applicable, suggesting a comparison.

Sentence

A group of words that forms a complete thought, generally including a subject and a verb, that expresses a declaration, inquiry, exclamation, or directive.

Depression

A mental health disorder characterized by persistently depressed mood or loss of interest in activities, causing significant impairment in daily life.

Connotation

The implied or associative meaning of a word or phrase, beyond its literal definition.