EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 18, Problem 28P

Revtek, Inc., has an equity cost of capital of 12% and a debt cost of capital of 6%. Revtek maintains a constant debt-equity ratio of 0.5, and its tax rate is 35%.

  1. a. What is Revtek’s WACC given its current debt-equity ratio?
  2. b. Assuming no personal taxes, how will Revtek’s WACC change if it increases its debt-equity ratio to 2 and its debt cost of capital remains at 6%?
  3. c. Now suppose investors pay tax rates of 40% on interest income and 15% on income from equity. How will Revtek’s WACC change if it increases its debt-equity ratio to 2 in this case?
  4. d. Provide an intuitive explanation for the difference in your answers to parts b and c.
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EBK CORPORATE FINANCE

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