WACC k bell jewlers wishes to explore the effect on its cost of capital of the...

WACC k bell jewlers wishes to explore the effect on its cost of capital of the rate at which the company psys taxe

s. the firm whishes to maintain a capital structure of 40% debt, 10% preferred stock and 50% common stock . the cost of financing with retained earnings is 10% the cost of preferred stock financing is 8% and the before tax cost of debt financing is 6% . Calculate the weighted average cost of capital WACC given the tax rate assumption in parts a to c

tax rate =40%

tax rate =35%

tax rate =25%

Solutions

Expert Solution

AS TAX RATE DECREASES, THE WACC INCREASES. THE BASIC REASON IS THAT HIGHER THE TAX RATE, COMPANY WILL HAVE HIGHER TAX ADVANTAGE DUE TO DEBT.

jeff jeffy answered 1 year ago

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