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

True, as tax shield always reduces the cost of debt component, thus after WACC is always less than before tax WACC

Source of Capital Weight (1) Cost (2) X(1 - tax rate) Weighted Cost (1) X (2) Long-Term Debt 0.4 5.60% 3.36% 1.34% Preferred Stock 0.1 10.60% 1.06% Common Stock Equity 0.5 13% 6.50% Totals 1 8.90%

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