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A firm's capital structure consists of the following market weights and after-tax costs: Source of Capital Market Weights After-Tax Cost Long-Term Debt 40% 6% Preferred Stock 25% 12% Common Stock 35% 15% Other things remaining constant, if the firm were to shift toward a capital structure with ____ its weighted average cost of capital will decrease
A firm's capital structure consists of the following market weights and after-tax costs:
| Source of Capital | Market Weights | After-Tax Cost |
| Long-Term Debt | 40% | 6% |
| Preferred Stock | 25% | 12% |
| Common Stock | 35% | 15% |
Other things remaining constant, if the firm were to shift toward a capital structure with ____ its weighted average cost of capital will decrease.
answer choices
Long-Term Debt: 35%; Preferred Stock: 35%; Common Stock Equity: 30%
Long-Term Debt: 45%; Preferred Stock: 15%; Common Stock Equity: 40%
Long-Term Debt: 30%; Preferred Stock: 40%; Common Stock Equity: 30%
Long-Term Debt: 35%; Preferred Stock: 40%; Common Stock Equity: 25%
Expert Solution
| return | weight | |
| 6.00% | 40.00% | 2.40% |
| 12.00% | 25.00% | 3.00% |
| 15.00% | 35.00% | 5.25% |
| 10.65% |
WACC = 6%*40% + 12%*25% + 15%*35% = 10.65%
| return | a | W*R | b | W*R | c | W*R | d | W*R |
| 6.00% | 35.00% | 2% | 45.00% | 3% | 30.00% | 2% | 35.00% | 2.10% |
| 12.00% | 35.00% | 4% | 15.00% | 2% | 40.00% | 5% | 40.00% | 4.80% |
| 15.00% | 30.00% | 5% | 40.00% | 6% | 30.00% | 5% | 25.00% | 3.75% |
| 10.80% | 10.50% | 11.10% | 10.65% |
Long-Term Debt: 45%; Preferred Stock: 15%; Common Stock Equity: 40%
if the firm were to shift toward a capital structure with __Long-Term Debt: 45%; Preferred Stock: 15%; Common Stock Equity: 40%__ its weighted average cost of capital will decrease.
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