Calculate firm wacc

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Your firm has a before-tax payoffs of 1800 on an investment of 800 and a marginal tax rate of 25%. The overall cost of capital is 10%. The firm currently uses 30% debt financing with an expected return of 7%. If it increases its use of debt to 40%, the expected return on the debt will be 8%.

a) Calculate your firm's WACC under the current and new capital structure.

b) By what percent will the value of the firm increase (decrease) if the firm decides to adopt the new capital structure?

c) By how much will the present value of the tax subsidy increase (decrease) if the firm adopts the new capital structure?

Reference no: EM133110504

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