Which of the following statements is correct? A. A firm\'s WACC should decrease

Question

Which of the following statements is correct?

A. A firm's WACC should decrease if its tax rate increases, but the yield to maturity of its noncallable bonds remains the same and all other factors are held constant.

B. The market value of a firm's debt and equity will continuously change throughout the day, but the book value of debt and equity tends to stay moe stable over time. Consequently, the firm should use the book-value weight to define its optimal capital structure.

C. If a firm wants to lower its cost of debt, it can simply issue debt with a lower coupon rate.

Explanation / Answer

WACC is calculated by following formula:

WACC = Weight of equity × Cost of equity + Weight of debt × Cost Of debt × (1 – Tax arte)

When Tax rate increase cost of debt will decrease and since everything else is constant to WACC of the company will naturally increase.

So Statement A is correct.

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