The effect of tax rate on WACC K. Bell Jewelers wishes to explore the effect on

Question

The effect of tax rate on WACC K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 20% debt, 20% preferred stock, and 60% common stock. The cost of financing with retained earnings is 15%, the cost of preferred stock financing is 12%, and the before-tax cost of debt financing is 6%. Calculate the weighted average cost of capital (WACC) given a tax rate of 40%. The firm's WACC is %. (Round to two decimal places.)

Explanation / Answer

ANSWER :-

Given 20 % debt, 20% preffered stock, 60% common stock.,cost of financing with retained earnings is 15%, cost of preffered stock financing is 12%, before tax cost of debt financing is 6%.

WACC for tax rate of 40% = 0.2*0.6* (1-0.4) + 0.2 *12 + 0.6*15

                                           = 0.2*0.6*0.6 + 0.2*12 + 0.6*15

                                            = 0.072+2.4+9

                                            = 11.472

                                WACC = 11.47%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.