Which of the following statements is most correct? Choose one answer. a. If a co
ID: 2663360 • Letter: W
Question
Which of the following statements is most correct?Choose one answer.
a. If a company tax rate increases but the yield to maturity of its noncallable bonds remains the same, the company marginal cost of debt capital used to calculate its weighted average cost of capital will fall.
b. All else equal, an increase in a company stock price will increase the marginal cost of common stock, rs.
c. All else equal, an increase in interest rates will decrease the marginal cost of common stock, rs.
d. Answers a and b are correct.
e. Answers b and c are correct.
Explanation / Answer
Statement A is correct; The debt cost used to calculate a firm's WACC is kd (1-T). If kd remains constant but T increases, then the term (1-T) decreases and the value of the entire equation, kd (1-T), decreases. Statement b is false; If a company's stock price increases, and all else remains constant, then the dividend yield decreases and rs decreases. This can be seen from the equation rs = D1/P0 + g. Statement c is also false for the same reason; The cost of issuing a new common stock is Ke=D1/P0(1-f)+ g . If P0 increases but there's no change in the flotation cost, ke will decrease.
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