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A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:

Source of capital                              Target Market Proportions                          After-tax Cost

Long-term debt                                                45%                                                                        5%

Preferred stock                                                10                                                                           14

Common stock equity                    45                                                                           22

 

If the firm were to shift toward a more leveraged capital structure (i.e., a greater percentage of debt in the capital structure), the weighted average cost of capital would

A) increase.

B) remain unchanged.

C) decrease.

D) not be able to be determined.

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