Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?
A) The ROA will decline.
B) The tax bill will increase.
C) Net income will decrease.
D) The times-interest-earned ratio will decrease.

Question

Quizplus · Accepted Answer

Issuing new stock to pay off debt will reduce interest expenses, leading to higher taxable income and thus a higher tax bill.

Taggart Technologies Is Considering Issuing New Common Stock and Using