Bulldogs Inc., a corporation with a 40% tax rate, plans to issue P500,000 of 5% preferred share in exchange for P500,000 of its 5% bonds currently outstanding. The total liabilities and equity of Bulldogs Inc. are equal to P5,000,000. Which of the following is the likely effect of this exchange on the firm’s weighted average cost of capital? no change, because of equal amounts of capital in the exchange and both preferred and bonds have the same rates an increase, because a portion of the debt payments are tax deductible a decline, because a portion of the debt payments are tax deductible a decrease, since preferred share dividend is not mandatory compared to interest payments for debt securities
Bulldogs Inc., a corporation with a 40% tax rate, plans to issue P500,000 of 5% preferred share in exchange for P500,000 of its 5% bonds currently outstanding. The total liabilities and equity of Bulldogs Inc. are equal to P5,000,000. Which of the following is the likely effect of this exchange on the firm’s weighted average cost of capital? no change, because of equal amounts of capital in the exchange and both preferred and bonds have the same rates an increase, because a portion of the debt payments are tax deductible a decline, because a portion of the debt payments are tax deductible a decrease, since preferred share dividend is not mandatory compared to interest payments for debt securities
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Bulldogs Inc., a corporation with a 40% tax rate, plans to issue P500,000 of 5% preferred share in exchange for P500,000 of its 5% bonds currently outstanding. The total liabilities and equity of Bulldogs Inc. are equal to P5,000,000. Which of the following is the likely effect of this exchange on the firm’s weighted average cost of capital?
no change, because of equal amounts of capital in the exchange and both preferred and bonds have the same rates
an increase, because a portion of the debt payments are tax deductible
a decline, because a portion of the debt payments are tax deductible
a decrease, since preferred share dividend is not mandatory compared to interest payments for debt securities
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