A Tax-Paying Firm Is Currently Financed with 50% Debt and 50

question 92

Multiple Choice

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:

Consumer Surplus

The difference between the maximum price a consumer is willing to pay for a good or service and the actual price they do pay, reflecting the economic benefit obtained by consumers.

Tax Revenue

Tax revenue represents the income that a government receives from taxing individuals and businesses within its jurisdiction.

Equilibrium Quantity

The quantity of goods or services that is supplied and demanded at the equilibrium price, where supply equals demand in a market.

Price

Price is the amount of money expected, required, or given in payment for something.