1. CCC Manufacturing Inc. is a very large and very profitable company. As such, the company is in the 35 percent marginal tax bracket for Federal income taxes. Ignore state and local income taxes in this problem. The company’s capital structure includes both bonds (debt) and common stock (equity). This year the company paid $1,000,000 in interest on their debt. The company also paid $2,000,000 in dividends to their common stockholders. What is the true, AFTER-TAX cost (to CCC Mfg. Inc.) of the $1,000,000 interest on their debt?

Zero (because interest expense is deductible)

$350,000

$650,000

$1,000,000

2. CCC Manufacturing Inc. is a very large and very profitable company. As such, the company is in the 35 percent marginal tax bracket for Federal income taxes. Ignore state and local income taxes in this problem. The company’s capital structure includes both bonds (debt) and common stock (equity). This year the company paid $1,000,000 in interest on their debt. The company also paid $2,000,000 in dividends to their common stockholders. What is the true, AFTER-TAX cost (to CCC Mfg. Inc.) of the $2,000,000 dividends paid to shareholders?

Zero (because dividends paid are deductible)

$700,000

$1,300,000

$2,000,000

3. Suppose that Goode Company has a capital structure of 80% equity and 20% debt. Its BEFORE-TAX cost of debt is 9%. Its cost of equity is 15%. Assume the appropriate weighted average tax rate is 30%. What is Goode Company’s AFTER-TAX WACC (Weighted Average Cost of Capital)?

9.66%

12.00%

12.54%

13.26%

13.80%