Which one of the following statements related to WACC is correct for a company that uses debt in its capital structure?
A) The WACC would most likely decrease if the firm replaced its preferred stock with debt.
B) The weight assigned to preferred stock decreases as the market value of the preferred stock increases.
C) The WACC will decrease as the corporate tax rate decreases.
D) The weight of equity is based on the number of shares outstanding and the book value per share.
E) The WACC will remain constant unless a company retires some of its debt.

Question

Quizplus · Accepted Answer

Debt financing often has a lower cost than equity or preferred stock financing due to the tax deductibility of interest payments, which can lead to a decrease in WACC when replacing preferred stock with debt.

Which One of the Following Statements Related to WACC Is