The CFO of Shalit Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds.Assume that the company,which does not pay any dividends,takes this action,and that total assets,operating income (EBIT),and its tax rate all remain constant.Which of the following would occur?

Question

Quizplus · Accepted Answer

DBy issuing new common stock and using the proceeds to pay off outstanding bonds, the company reduces its interest expenses (since bonds typically require interest payments and stock does not). This reduction in interest expenses means the company retains more of its operating income, leading to an increase in net income (C). Since the company is paying less in interest, its taxable income would be higher, not lower, but because it retains more of its operating income after interest, the actual tax paid would decrease if the tax rate remains constant (D).

The CFO of Shalit Industries Plans to Have the Company