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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.


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