QUESTION 11 1 points Sav Which of the following statements is CORRECT? O We shou

Question

QUESTION 11 1 points Sav Which of the following statements is CORRECT? O We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes. If a company s tax rate increases but the YTM on its bonds remains the same, the after-tax cost of its debt will fal None of these O When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are deductible by the paying corporation All else equal, an increase in a company's stock price will increase its marginal cost of new common equity, re

Explanation / Answer

Dividend payments are not eligible for tax deduction but interest payments are eligible for tax deduction. So cost of debt (YTM) must be reduced by the tax saving. If tax rate increase, after-tax ytm will decrease.

Hence, correct option is "If a company tax rate increase but the YTM on its bonds remains the same, the after-tax cost of debt will fall".

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.