133. CSO: 2B4a LOS: 2B4b Joint Products Inc., a corporation with a 40% marginal tax rate, plans to issue $1,000,000 of 8% preferred stock in exchange for $1,000,000 of its 8% bonds currently outstanding. The firm’s total liabilities and equity are equal to $10,000,000. The effect of this exchange on the firm’s weighted average cost of capital is likely to be a. no change, since it involves equal amounts of capital in the exchange and both instruments have the same rate. b. a decrease, since a portion of the debt payments are tax deductible. c. a decrease, since preferred stock payments do not need to be made each year, whereas debt payments must be made. d. an increase, since a portion of the debt payments are tax deductible.

2B4B JOINT PRODUCTS INC., A CORPORATION WITH A 40% MARGINAL TAX RATE,...

CMA EXAM SUPPORT PACKAGE 2

133.

CSO: 2B4a

LOS: 2B4b

Joint Products Inc., a corporation with a 40% marginal tax rate, plans to issue $1,000,000

of 8% preferred stock in exchange for $1,000,000 of its 8% bonds currently outstanding.

The firm’s total liabilities and equity are equal to $10,000,000. The effect of this

exchange on the firm’s weighted average cost of capital is likely to be

no change, since it involves equal amounts of capital in the exchange and both

instruments have the same rate.

a decrease, since a portion of the debt payments are tax deductible.

a decrease, since preferred stock payments do not need to be made each year,

whereas debt payments must be made.

an increase, since a portion of the debt payments are tax deductible.