Question

Adjusted WACC. Lewis runs an outdoor adventure company and wants to know what effect a tax change will have on his​ company's WACC. Currently, Lewis has the following financing​ pattern:

​Equity: 41​% and cost of 15.66​%

Preferred​ stock: 13​% and cost of 12.93​%

​Debt: 46​% and cost of 9.5​% before taxes

What is the adjusted WACC for Lewis if the tax rate is

a.  40​%?

b.  30​%?

c.  15​%?

d.  5​%?

e.  0​%?

Answer 1

a)

WACC = Weight of equity*cost of equity + weight of debt*cost of preferred stock + weight of debt*after tax cost of debt

WACC = 0.41*0.1566 + 0.13*0.1293 + 0.46*0.095*(1 - 0.4)

WACC = 0.06421 + 0.01681 + 0.02622

WACC = 0.1072 or 10.72%

b)

WACC = Weight of equity*cost of equity + weight of debt*cost of preferred stock + weight of debt*after tax cost of debt

WACC = 0.41*0.1566 + 0.13*0.1293 + 0.46*0.095*(1 - 0.3)

WACC = 0.06421 + 0.01681 + 0.03059

WACC = 0.1116 or 11.16%

c)

WACC = Weight of equity*cost of equity + weight of debt*cost of preferred stock + weight of debt*after tax cost of debt

WACC = 0.41*0.1566 + 0.13*0.1293 + 0.46*0.095*(1 - 0.15)

WACC = 0.06421 + 0.01681 + 0.03715

WACC = 0.1182 or 11.82%

d)

WACC = Weight of equity*cost of equity + weight of debt*cost of preferred stock + weight of debt*after tax cost of debt

WACC = 0.41*0.1566 + 0.13*0.1293 + 0.46*0.095*(1 - 0.05)

WACC = 0.06421 + 0.01681 + 0.03715

WACC = 0.1225 or 12.25%

e)

WACC = Weight of equity*cost of equity + weight of debt*cost of preferred stock + weight of debt*after tax cost of debt

WACC = 0.41*0.1566 + 0.13*0.1293 + 0.46*0.095*(1 - 0)

WACC = 0.06421 + 0.01681 + 0.0437

WACC = 0.1247 or 12.47%