QUESTION 6 Which of the tollowing statements is CORRECT? All else equal, an incr

Question

QUESTION 6 Which of the tollowing statements is CORRECT? All else equal, an increase in a company's stock price will increase its marginal cost of new common equity, re O None of these. 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 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 OIf a company s tax rate increases but the YTM on its bonds remains the same, the atter tax cost of ts debt will fall

Explanation / Answer

YTM is the return earned by the investor from purchasing the bond and holding the bond till maturity. YTM does not take tax into consideration. In company view YTM*(1-Tax rate) is after tax cost of debt as interest is eligible for tax deduction.

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

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