Question

XYZ company faces variable costs of debt and equity depending on the capital structure of the firm as given in table below.

(a) Calculate the weighted average cost of capital (WACC) at each tax rate (from 10% to 70% by increments of 10%) by filling out the table on next page. Make sure to report weighted average cost of capital numbers at 4 decimal places of accuracy such as 12.3456% or 1.0023%.

Hint: You can easily do mistakes if you make manual calculations. Instead, you might want to use Microsoft Excel to create a spreadsheet model where you repeatedly keep changing tax

(b) What is the minimum weighted average cost of capital at each tax rate?

	10% tax rate	20% tax rate	30% tax rate	40% tax rate	50% tax rate	60% tax rate	70% tax rate
Weighted Average Cost of Capital

(c) What is the optimal capital structure at each tax rate?

	10% tax rate	20% tax rate	30% tax rate	40% tax rate	50% tax rate	60% tax rate	70% tax rate
Optimal Capital Structure	D= __% E= __%	D= __% E= __%	D= __% E= __%	D= __% E= __%	D= __% E= __%	D= __% E= __%	D= __% E= __%

you can do a few, just to know how to do rest

Weighted Average Cost of Capital (WACC) at various tax rates Proportion of Debt [ = D/(D+E)] Cost of Debt Cost of Equity 10% tax rate 20% tax rate 30% tax rate 40% tax rate 50% tax rate 60% tax rate 70% tax rate 4.50% 9.25% 4.65% 9.50% 4 85% 9.80% 5.10% 10.15% 5.40% 10.55% 11.00% 5.80% 6.30% 11.50% 12.05% 6.90% 7.60% 12.65% 8.40% 13.35% 50% 9.32% 14.15% 55% 10.37% 15.05% 60% 11.56% 16.05% 12.90% 17.15% 14.40% 18.35% 70% 75% 16.07% 19.65% 80% 17.92% 21.05%

Answer 1

I have done all the calculation below :

Please let me know incase you have any query.

AB J K 75% F G H I WACC AT VARIOUS TAX RATE 10% 20% 30% 40% 50% 9.2500% 9.2500% 9.2500% 9.2500% 9.2500% 9.2343% 9.2110% 9.1878% 9.1645% 9.1413% 9.2565% 9.2080% 9.1595% 9.1110% 9.0625% 9.3160% 9.2395% 9.1630% 9.0865% 9.0100% 9.4120% 9.3040% 9.1960% 9.0880% 8.9800% 9.5550% 9.4100% 9.2650%' 9.1200% 8.9750% 9.7510% 9.5620% 9.3730% 9.1840% 8.9950% 10.0060% 9.7645% 9.5230% 9.2815% 9.0400% 10.3260% 10.0220% 9.7180% 9.4140% 9.1100% 10.7445% 10.3665% 9.9885% 9.6105% 9.2325% 11.2690% 10.8030% 10.3370% 9.8710% 9.4050% 11.9057% 11.3353% 10.7650% 10.1946% 9.6243% 12.6624% 11.9688% 11.2752% 10.5816% 9.8880% 13.5490% 12.7105% 11.8720% 11.0335% 10.1950% 14.5770% 13.5690% 12.5610% 11.5530% 10.5450% 15.7598% 14.5545% 13.3493% 12.1440% 10.9388% 17.1124% 15.6788% 14.2452% 12.8116% 11.3780% 2 D/(D+E) E/ (D+E) COST OF DEBT COST OF EQUITY 0% 100% 4.50% 9.25% 5% 95% 4.65% 9.50% 10% 90% 4.85% 9.80% 15% 85% 5.10% 10.15% 20% 80% 5.40% 10.55% 25% 5.80% 11.00% 30% 70% 6.30% 11.50% 35% 6.90% 12.05% 40% 60% 7.60% 12.65% 45% 55% 8.40% 13.35% 50% 50% 9.32% 14.15% 55% 45% 10.37% 15.05% 60% 40% 11.56% 16.05% 65% 35% 12.90% 17.15% 70% 30% 14.40% 18.35% 75% 25% 16.07% 19.65% 80% 20% 17.92% 21.05% 65% 60% 9.2500% 9.1180% 9.0140% 8.9335% 8.8720% 8.8300% 8.8060% 8.7985% 8.8060% 8.8545% 8.9390% 9.0539% 9.1944% 9.3565% 9.5370% 9.7335% 9.9444% 70% 10% 9.2500% =$A3*$C3*(1-$E$2)+$B3*$D3 9.0948% =A4*C4*(1-$E$2)+B4*D4 8.9655% =A5*C5*(1-$E$2)+B5*D5 8.8570% =A6*C6*(1-$E$2)+B6*D6 8.7640% =A7*07*(1-$E$2)+B7*D7 8.6850% =A8*C8*(1-$E$2)+B8*D8 8.6170% =A9*C9*(1-$E$2)+B9*D9 8.5570% =A10*C10*(1-$E$2)+B10*D10 8.5020% =A11*C11*(1-$E$2)+B11*D11 8.4765%|=A12*C12*(1-$E$2)+B12*D12 8.4730% =A13*C13*(1-$E$2)+B13D13 8.4836% =A14*C14*(1-$E$2)+B14*D14 8.5008%|=A15*C15*(1-$E$2)+B15* D15 8.5180% =A16*C16*(1-$E$2)+B16*D16 8.5290% =A17*C17*(1-$E$2)+B17*D17 8.5283%]=A18*C18*(1-SE$2)+B18* D18 8.5108% =A19*C19*(1-$E$2)+B19*D19 Optima Cpital Structure for E4 5% debt, 95% equity, Tax 10% Similarly you can check for others Formula used for 10% tax, you can do same for other as well I have highlighted min WACC at each tax rate in yellow