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Company issues new shares and with that money pays back a bank loan
Company issues new shares and with that money pays back a bank loan. Company's cost of capital (WACC) should:
Select one:
a.
Decrease, as company doesn't pay any dividends
b.
decreases because the company now pays less interest
c.
Remain unchanged as the total capital has not changed
d.
Increase because equity is more expensive as debt
Expert Solution
When the company is issuing with new equity shares and it is using that money to pay back the bank loan then, it will mean that the bank loan is a type of debt which is getting reduced and it is reflected at increase in equity and decrease in that which will be leading to increased in the weighted average cost of capital because cost of equity is higher than the cost of debt.
All the other statements are false.
Correct answer is option (D) increased, because equity is more expensive as debt.
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