Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Burnham Brothers Inc
Burnham Brothers Inc. has no retained earnings since it has always paid out all of its earnings as dividends. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?
| a. |
Expected inflation increases. |
|
| b. |
The tax rate increases. |
|
| c. |
The flotation costs associated with issuing preferred stock increase. |
|
| d. |
The market risk premium increases. |
|
| e. |
The company's beta increases. |
Expert Solution
WACC = weight of equity x cost of equity + weight of debt x cost of debt (1-tax rate) + weight of preferred stock x cost of preferred stock
Here, if the tax rate increases, the WACC will drop. Hence, the correct answer is-
b. The tax rate increases
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
