Question

Adjusted WACC.

Lewis runs an outdoor adventure company and wants to know what effect a tax change will have on his​ company's WACC. ​ Currently, Lewis has the following financing​ pattern:

​Equity:  26​% and cost of 18.71​%

Preferred​ stock:  19​% and cost of 12.31​%

​Debt:  55​% and cost of 10.8​% before taxes

What is the adjusted WACC for Lewis if the tax rate is

a.  

40​%?

b.  

30​%?

c.  

15​%?

d.  

5​%?

e.  

0​%?

Answer 1

WACC = % of Financing in Common Stock X Cost of common Stock + % of Financing in Preferred Stock X Cost of Preferred Stock + % of Financing in debt X after tax cost of Debt

Requirement a

WACC = (0.26 X 0.1871 )+( 0.19 X 0.1231 )+ (0.55 X0.108 x(1-0.4))

WACC = 0.1077 or 10.77%

Requirement b

WACC = (0.26 X 0.1871 )+( 0.19 X 0.1231 )+ (0.55 X0.108 x(1-0.3))

WACC = 0.1136 or 11.36%

Requirement c

WACC = (0.26 X 0.1871 )+( 0.19 X 0.1231 )+ (0.55 X0.108 x(1-0.15))

WACC = 0.1225 or 12.25%

Requirement d

WACC = (0.26 X 0.1871 )+( 0.19 X 0.1231 )+ (0.55 X0.108 x(1-0.05))

WACC = 0.1285 or 12.85%

Requirement e

WACC = (0.26 X 0.1871 )+( 0.19 X 0.1231 )+ (0.55 X0.108)

WACC = 0.1314 or 13.14%