Company X has debt to equity ratio equal to one. Its cost of equity is 10% and its cost of debt is 5%. Keeping fixed the company's capital structure, how does a cut in the corporate tax rate from 20% to 10% affect X's weighted average cost of capital (WACC)? The WACC is reduced since the tax cut makes it easier to raise finance It increases the WACC from 7% to 7.25% It reduces the WACC from 7.5% to 7.25% The WACC is unaffected
Company X has debt to equity ratio equal to one. Its cost of equity is 10% and its cost of debt is 5%. Keeping fixed the company's capital structure, how does a cut in the corporate tax rate from 20% to 10% affect X's weighted average cost of capital (WACC)? The WACC is reduced since the tax cut makes it easier to raise finance It increases the WACC from 7% to 7.25% It reduces the WACC from 7.5% to 7.25% The WACC is unaffected
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Company X has debt to equity ratio equal to one. Its
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The WACC is reduced since the tax cut makes it easier to raise finance |
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It increases the WACC from 7% to 7.25% |
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It reduces the WACC from 7.5% to 7.25% |
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The WACC is unaffected |
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