Question 19

Assume that the firm is 40% financed by debt and 60% financed by equity. Its cost of debt is 8% and the cost of equity is 15%. The tax rate is 40%. The chief financial officer is considering to issue additional debt such that the share of debt increases to 70%. What will be the firms WACC after the new issuance?

1. 8.75%.
2. 9.36%.
3. 10.92%.
4. 13.00%.

What is one of the advantages of debt over equity from the companys perspective?

1. It increases the companys cost of capital.
2. Its interest payments increase the net income to the shareholders.
3. Its interest payments are tax deductible.
4. Both A and C are correct.