Which one of the following statements is correct? Assume the pre-tax cost of debt is less than the cost of equity.

Question

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If the government changes its tax policies, it may affect the attractiveness of debt financing, and a firm may change its capital structure to optimize its cost of capital. The cost of preferred stock is not affected by changes in tax rates, and a decrease in a firm's debt-to-equity ratio would generally increase the cost of equity. A decrease in systematic risk would generally decrease a firm's cost of capital, not increase it. Finally, a decrease in dividend growth rate would also decrease the cost of equity, as investors would require a lower return on their investment due to the lower growth prospects.

Which One of the Following Statements Is Correct? Assume the Pre-Tax