Homework Answers
Tax advantage is available only on debt component of capital as interest paid on debt is tax deductible
When tax rate decreases, WACC will increase by Cost of Debt*Decrease in Tax rate*Weight of Debt
= 17%*8%*30%
= 0.408
Hence, the answer is Increase of 0.408%
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values, that consists of 30 percent debt, 5 percent preferred
stock, and 65 percent common stock. If the returns required by
investors are 12 percent, 13 percent, and 15 percent for the debt,
preferred stock, and common stock, respectively, what is Pharoah’s
after-tax WACC? Assume that the firm’s marginal tax rate is 40
percent.
I solved it wrong by doing 30%*12*(1-40%)+13%*12%*+65%*15%=
0.021600 + 0.015600 + 0.097500=
0.1347=13.47%
I am not...
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