Given the tax rate of 40% of this corporation, calculate its after-tax weighted

Question

Given the tax rate of 40% of this corporation, calculate its after-tax weighted average cost of capital (WACC) for ABC Corporation.

Table: the before-tax weighted average cost of capital (WACC) for ABC Corporation

Answer true, false or uncertain and explain briefly on the following statement. "the after-tax wacc cannot ever be higher than the before-tax wacc."

Source of Capital Weight (1) Cost (2) Weighted Cost (1) X (2) Long-Term Debt .4 5.6% 2.24% Preferred Stock .1 10.6% 1.06% Common Stock Equity .5 13% 6.5% Totals 1 9.8%

Explanation / Answer

This statement is true.

We get a tax benefit on debt or bonds. Therefore, after tax cost of bond is always lower than before tax bond. This tax benefit reduced the WACC,

Also if there is no bond in the capital structure, before tax and after tax WACC both will be the same. Therefore, After tax WACC can not ever be higher than before tax wacc.

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

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