Effect of tax rate on WACC

a. WACC = (0.40)(6%)(1 - 0.40) + (0.10)(8%) + (0.50)(10%) WACC = 1.44% + 0.8% + 5% WACC = 7.24%

b. WACC = (0.40)(6%)(1 - 0.35) + (0.10)(8%) + (0.50)(10%) WACC = 1.56% + 0.8% + 5% WACC = 7.36%

c. WACC = (0.40)(6%)(1 - 0.25) + (0.10)(8%) + (0.50)(10%) WACC = 1.80% + 0.8% + 5% WACC = 7.60%

d. As the tax rate falls, the weighted-average cost of capital goes up. The lower the tax rate, the lower the government “subsidy” for debt.

The after-tax cost of debt is _________ Note using a calculator the before-tax cost of debt is slightly higher at 10.84%

The cost of preferred stock is________

The cost of common stock is ________ Note you'll need to use the growth rate of dividends, 7.1%.

The WACC using the weights given in the question is ___________