"Corporate Finance":weighted average cost of capital
A company’s asset beta is 1.2 based on a debt-to-equity ratio (D/E) of 50%. If the company’s tax rate increases, the associated equity beta will most likely:
C 、remain unchanged.
The following information is available for a company:
● Bonds are priced at par and have an annual coupon rate of 9.2%.
● Preferred stock is priced at $8.18 and pays an annual dividend of $1.35.
● Common equity has a beta of 1.3.
● The risk-free rate is 4% and the market premium is 11%.
● Capital structure: Debt = 30%; Preferred stock = 15%; Common equity =
● The tax rate is 35%.
The weighted average cost of capital (WACC) for the company is closest to:
B is correct.
If the tax rate increases, then the bracketed term (1 – tax rate) decreases, making the equity beta decrease because the asset beta is unchanged.
A is incorrect because the equity beta decreases.
C is incorrect because the equity beta decreases.