Suppose the debt ratio (D/TA) is 10%, the current (before-tax) cost of debt is 8%, the...
Suppose the debt ratio (D/TA) is 10%, the current (before-tax) cost of debt is 8%, the current cost of equity is 16%, and the tax rate is 40%. An increase in the debt ratio to 20% would have decreased the weighted average cost of capital (WACC).
true or false?
Homework Answers
The statement is TRUE
Weighted average cost of capital = Before tax cost of Debt(1-Tax rate)*Weight of Debt + Cost of Equity*Weight of Equity
Hence, increase in weight of debt in capital structure would have decreased the WACC
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Suppose the debt ratio (D/TA) is 10%, the current (before-tax)
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