File Edit View History Bookmarks Iools Help O Aplia: Student Question C Chegg St

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File Edit View History Bookmarks Iools Help O Aplia: Student Question C Chegg Study IGuided solu CengageBrain My Home ii courses aplia.com/af/servlet/quiz?ctc syildiz-o005&quiz; action takeQuiz&quiz; probGuid-QNAPcoAS01010000002e8c44a0050000&ck; 1 1460846695216 oAAA0559014F749 9ECAF 30000 2. The weighted average cost of capital Aa Aa The importance of cost of capita Corellian Engineering Corp. has two divisions: one is very risky, and the other has significantly less risk. The company uses its investors' overall required rate of return to evaluate projects. It is most likely that the firm will become: O Less risky over time, and its value will decrease O Riskier over time, and its value will decrease O Riskier over time, and its value will increase o Less risky over time, and its value will increase Which of the following statements is correct? O The cost of raising funds from retained earnings is usually a lot cheaper than the cost of debt financing, because the firm already possesses the funds in retained earnings O A firm's after-tax cost of preferred stock may be significantly less than its before-tax cost, because issuing preferred stock dividends creates a tax shelter. O 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. sh Player WIN 21,0, 0,213 Q3 3.34.1 O 2004-2016 Ap Grade It Now Save & Continue ghts r 2013 Cengage rning eXC O E Suggestions Session 59:35 Timeout

Explanation / Answer

a. Answer Option - B: Riskier over time and its value will decrease.

Expnation:There is no reason to expect its risk position or value to change over time as a result of its use of a single discount rate

b. Answer Option - C - A firms WACC should decrease if the tax rate increases, but the yield to maturity of its non callable bonds remain the same

Explanation: Debt financing has a tax advantage, hence cost of retained earnings is not cheaper than debt (option a ruled out). Preferred stock do not provide a tax shield (option b ruled out) .Hence answer is option c

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