1. When a firm issues permanent debt, the value of all its securities:
Does not change
Increases by the present value of the tax shield
Increases by the annual interest tax shield
2. Suppose that the weighted average cost of capital of Fett & Co. is 10%. If Fett has a capital structure with equal amounts of debt and equity, a before-tax cost of debt of 5%, and a marginal tax rate of 20%, then its cost of equity capital is closest to:
14%
16%
12%