Westbrook\'s Painting Co. plans to issue a $1,000 par value, 20-year non-callabl

Question

Westbrook's Painting Co. plans to issue a $1,000 par value, 20-year non-callable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 30.00%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted? Westbrook's Painting Co. plans to issue a $1,000 par value, 20-year non-callable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 30.00%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?

Explanation / Answer

before tax cost of debt

7%

after tax cost of debt when tax rate is 40%

before tax cost of debt*(1-tax rate)

7*(1-.4)

4.2

before tax cost of debt

7%

after tax cost of debt when tax rate is 30%

before tax cost of debt*(1-tax rate)

7*(1-.3)

4.9

component cost of debt used to calculate the WACC change

4.9-4.2

0.7

before tax cost of debt

7%

after tax cost of debt when tax rate is 40%

before tax cost of debt*(1-tax rate)

7*(1-.4)

4.2

before tax cost of debt

7%

after tax cost of debt when tax rate is 30%

before tax cost of debt*(1-tax rate)

7*(1-.3)

4.9

component cost of debt used to calculate the WACC change

4.9-4.2

0.7

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