All other things being equal, the effect of issuing preferred stock in exchange for long-term debt will be an increase in Joint Products' cost of capital, because interest on debt is tax-deductible and that lowers its effective cost. So by decreasing the proportion of debt in its capital structure, Joint Products will increase its weighted average cost of capital. However, there should also be a decrease in the company's cost of capital, because investors may perceive less risk in investing in Joint Products due to the decreased financial leverage in its capital structure. Whether the WACC increase because of the decreased proportion of debt in the capital structure or the WACC decrease because of the decreased financial leverage will be greater, leading to a net increase or a net decrease in the WACC, will depend on the magnitude of each change.
This answer is partially true, though it is not the best answer. It is true that one of the effects on the WACC should be a decrease in the company's cost of capital, but it is because investors may perceive less risk in investing in Joint Products due to the decreased financial leverage in its capital structure. However, this is not the only change in the WACC that may take place as a result of issuing preferred stock in exchange for long-term debt.
The debt payments are tax deductible, whereas dividend payments are not. However, reducing debt and increasing equity by issuing preferred stock in exchange for debt instruments will not cause a decrease in the weighted average cost of capital.
There will be a change in the company's weighted average cost of capital as a result of exchanging debt instruments for preferred equity instruments.
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