Question

Which statement is true? Group of answer choices Increase in the market risk premium will affect...

Which statement is true?

Group of answer choices

Increase in the market risk premium will affect the capital structure weights.

The repurchase of preferred stock will decrease the weight of debt.

An increase in the market value of preferred stock will increase the firm's WACC.

The cost of preferred stock is unaffected by tax rate.

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Answer #1

(A) True : When the market risk premium changes, the expected return on stock will change, which will change the stock price. Stock price will affect the weight of stock in capital structure.

(B) False : Repurchase of preferred stock will rather increase the weight of debt in cap structure as the total capital has reduced now.

(C) False : Increase in preffered stock weight will decrease the WACC becasue Preffered stock is cheaper than equity and its weight increase will decrease the total cost.

(D) True : Preference dividend is not tax deductible, hence its rate is unaffected by tax.

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