Question

In: Finance

All else equal, firm A has a higher tax rate than firm B. As a result,...

All else equal, firm A has a higher tax rate than firm B. As a result, which firm has a lower WACC?

Expert Solution

In this case firm firm A has higher tax rate then firm B, this mean that firm A has higher taxable income than firm B.

As a higher of taxable income of Firm A result may be many are, one of the reason for higher taxable income would be that firm Weighted Average Cost of Capital (WACC) is low.

Firm A may be Lowest Weighted Average Cost of Capital therefore thay have highest taxable income and also higher tax liability then firm B.

Here firm B has lower taxable income than firm A which may be many reason one of them may be that firm Cost of Capital (CoC) or Weighted Average Cost of Capital (WACC) may higher.

Weighted Average cost of capital mean weight given to rate of finance charge in camperision to to debt avail by the organaisation / firm.

There are many component of WACC. Some of them is given below :-

- Direct Finance from Bank

-Bill Discounting

-Advance from customer

-Finance from NBFC

-Finance from Institutional Invester

-Private Finance

-Funance by way of issued of share

-Finance by way of Debenture /Bond etc.

-other financing.

At the end conclusion will be that Firm A has lower WACC as a result of that taxable income higher.

jeff jeffy answered 4 weeks ago

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