Changes in rate of taxation-weighted average cost of capital

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Reference no: EM131052344

The effect of tax rate on WACC: K. Bell Jewelers wishes to exlore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred stock, and 50% common stock. The cost of financing with retained earnings is 10%, the cost of preffered stock financing is 8%, and the before-tax cost of debt financing is 6%. Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts a to c.

A. Tax rate= 40%

B. Tax rate= 35%

C. Tax rate= 25%

D. Describe the relationship between changes in the rate of taxation and the weighted average cost of capital.

Reference no: EM131052344

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