Final answer:
Among the provided statements, the true ones concerning the firm's WACC are that the WACC will be higher if the cost of debt is higher and it will be lower if the firm has a higher tax rate.
Step-by-step explanation:
The student asked which statements are true regarding a firm's Weighted Average Cost of Capital (WACC) when it has both preferred and common stock outstanding. Let's break down the concepts:
- 1) The WACC will indeed be higher if the firm has a higher cost of debt, as debt is a component of the capital structure and therefore affects the WACC.
- 2) The WACC will be higher, not lower, if the firm has a higher cost of equity because equity is also part of the capital structure.
- 3) The WACC will not be the same regardless of the firm's capital structure. It is affected by the proportions of debt, preferred stock, and equity used to finance the company.
- 4) The WACC will be lower if the firm has a higher tax rate because interest payments on debt are tax-deductible, which reduces the after-tax cost of debt, and thus the WACC.
Therefore, the true statements in relation to the WACC of a firm with both preferred and common stock are 1 and 4.