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Natah, a builder of acoustic accessories, has no debt and an equity cost of capital of 13%. Suppose NatNah decides to increase its leverage to maintain a market debt-to-value ratio of 0.5. Suppose its debt cost of capital is 8% and its corporate tax rate is 35%-lf Natahs pre-tax WACC remains constant, what will be its (effective after-tax) WACC with the increase in leverage?

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Answer #1
Effective after tax rate = Pretax WACC - rd*t*((D/(E+D)
= 13 - 0.5*8*.35 = 11.775%
where, rd = cost of debt, t=tax rate, D=value of debt and E=value of equity
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