Which of the following statements is true? When a firm issues bonds of equal or higher priority to its existing debt, the value of both the existing bonds and the value of the equity will decrease O When a firm can issue bonds of equal or higher priority than its existing bonds, the value of the firm is decreased due to the higher cost of debt capital Although the value of a firm is unchanged if it can issue debt of equal or greater priority to its existing debt, its cost of debt capital will be higher None of them

Option A is correct. The value of both equity and existing debt will decrease because both the securities will have now lower chances of being paid back in the event of distress in the company. Hence, the risk has increased for those investors. Option B is false as the value of a firm will not decrease upon issuing more debt. Option C is false as cost of debt will be lower as they are issuing senior debt which will have preference in payment before the existing debt and hence its cost of capital will be lower than the existing cost of debt