All Else Constant, the Weighted Average Cost of Capital for a Risky

question 99

Multiple Choice

All else constant, the weighted average cost of capital for a risky, levered firm will decrease if:

• A)the firm's bonds start selling at a premium rather than at a discount.
• B)the market risk premium increases.
• C)the firm replaces some of its debt with preferred stock.
• D)corporate taxes are eliminated.
• E)the dividend yield on the common stock increases.

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Definitions:

Medium of Exchange

A go-between resource or framework designed to support the transfer, acquisition, or exchange of commodities among participants.

Opportunity Cost

The cost of foregoing the next best alternative when making a decision.

Foregone Interest

The potential interest income lost by choosing an alternative investment or spending decision instead of the present option that yields interest.

FDIC Insurance

A federal guarantee of safety for depositor funds in member banks, up to a defined limit.