Westwood Ltd.’s capital structure consists of 500,000 common shares, which have a current market price of $25 per share. The underwriter has informed management that the firm’s weighted average cost of capital (WACC) could be significantly reduced if it issues $2.5 million of long-term debt and uses the proceeds to purchase and then retire 100,000 common shares. If Westwood undertakes this proposal to alter its capital structure, which of the following statements about the impact on the cost of common equity is true?

a) There is insufficient information to determine the impact of the change in capital structure on the cost of common equity.

b) The cost of common equity will decrease.

c) The cost of common equity will remain unchanged.

d) The cost of common equity will increase.

Answer rating: 100% (QA)

The cost of common equity will remain unchanged Explanation ... View the full answer