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:

Direct Labor-Hours

A unit of measure for the time workers spend producing goods or services, indicative of the labor cost attributed per hour.

Variable Overhead

Costs that vary with production volume, such as utilities or materials, as opposed to fixed overhead costs.

Direct Materials

Raw materials that can be directly attributed to the production process of specific goods or services.

Direct Labor-Hours

A measure of the work done by production workers, calculated in hours.