Paychex Salestorcehttps://portal.allen IVILS Detrol Remaining Time: 30 minutes,

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Paychex Salestorcehttps://portal.allen IVILS Detrol Remaining Time: 30 minutes, 25 seconds. Courses Question Completion Status: 15 16 21 22 QUESTION 15 C. Ronaldo Corporation plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 44.00%, but Congress is considering a change in the corporate tax rate to 34%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted? 0.81% ? 0.70% 0.91% ? 0.6196 O 0.69% QUESTION 16

Explanation / Answer

Set your calculators to 2 Periods/Year

40 n

1000 FV

-1000 PV

35 PMT

YTM 7%

At tax rate = 44%

After-Tax rd = 7% (1 – 44%) = 3.92%

If new tax rate = 34% were adopted:

After-Tax rd = 7% (1 – 34%) = 4.62%

Difference = Cost at new rate ? Cost at old rate = 4.62% - 3.92% = 0.7%

Thus, if tax rate is reduced, the after-tax cost of debt increases, and this causes the WACC to increase as well.

Option "B" is correct.

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