Question

g Which of the following statements is CORRECT? a. Since the money is readily available, the after-tax cost of reinvested earnings (not newly issued stock) is usually much lower than the after-tax cost of debt. b. If a company's tax rate increases but the YTM on its noncallable bonds remains the same, the after-tax cost of its debt will fall. c. All else equal, an increase in a company's stock price will increase its marginal cost of new common equity, re. d. All else equal, an increase in a company's stock price will increase its marginal cost of reinvested earnings (not newly issued stock), rs.

Answer 1

Answer:

b. If a company's tax rate increases but the YTM on its noncallable bonds remains the same, the after-tax cost of its debt will fall.

Explanation:

As we know that the cost of debt could be determined by applying the RATE formula in the excel

And, the following tax cost of debt is

= Cost of debt × (1 - tax tate)

In this case , the before the cost of debt or cost of debt remains constant but the tax rate is rising so automatically the following tax cost of debt would decrease

hence, the option b is correct