Question

Please answer both. Thank you.

Vpe Rare Minerals and Metals Inc's capital structure is briefly described below. Compute the company's weighted average cost of capital ("WACC). The company's marginal income tax rate is 25%. Calculate to 4 decimal places. Capital Capital Structure Weights Pre-Tax Cost Bonds 0.35 7.80% Preferred Stock 0.15 11.75% Common Stock 0.50 25.00% 16.57% 16.95% 16,31% 15.12% Question 10 8.55 pts If corporate income tax rates decrease, this change would tend to make a company's weighted average cost of capital because Increase because dividends on stock are deluctible for income tax purposes, and a higher income tax rate makes the after tax cost of equity capital lower. increase because interest expense on debt is deductible for income tax purposes, and a lower income tax rate makes the after-tax cost of debt higher decrease because interest expense on debt is deductible for income tax purposes and a lower income tax rate makes the after-tax cost of debt lower decrease because interest expense ondebt and dividends on stock are deductible for income tax purposes and a higher income tax rate makes the after tax cost of debt and equity capital lower

Answer 1

9. The WACC formula is given as:

WACC = Cost of Debt x Debt% x (1 - T) + Cost of Preferred Stock x Preferred Stock% + Cost of Common Stock x Common Stock% = 7.8 x 0.35 x 0.75 + 11.75 x 0.15 + 25 x 0.5 = 16.31%

Option C is correct.

10. Option B is correct. This is a fact related to After tax cost of debt as shown in the formula of WACC in question 9.