I cannot understand why answer D is correct. Is it because issuing stock dilutes shareholder value, while debt increases equity without having to issue stock?
Q: IIA Insurance Company's weighted average cost of capital (WACC) is important in determining potential project investments. IIA is considering the investment in a project that will provide a return to IIA of 9 percent. Which one of the following investment mixes will provide an increase in shareholder value with this investment mix?
A. 80% common stock at 10% + 20% debt at 8%
B. 70% common stock at 12% + 5% preffered stock at 7% + 25% debt at 6%
C. 60% common stock at 12% + 40% debt at 10%
D. 20% preferred stock at 8% + 80% debt at 6%.
Q: IIA Insurance Company's weighted average cost of capital (WACC) is important in determining potential project investments. IIA is considering the investment in a project that will provide a return to IIA of 9 percent. Which one of the following investment mixes will provide an increase in shareholder value with this investment mix?
A. 80% common stock at 10% + 20% debt at 8%
B. 70% common stock at 12% + 5% preffered stock at 7% + 25% debt at 6%
C. 60% common stock at 12% + 40% debt at 10%
D. 20% preferred stock at 8% + 80% debt at 6%.
Does this question make sense?
