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AVLSN Co. plans to issue a $1,000 par value, 20-year noncallable bond with a 6.00% annual...

AVLSN Co. plans to issue a $1,000 par value, 20-year noncallable bond with a 6.00% annual coupon, paid semiannually. The company's marginal tax rate is 39.00%, but Congress is considering a change in the corporate tax rate to 21.00%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?

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Answer #1

The FV = $1000

N = 40 YEARS

PMT = 3% * 1000

= $30

COMPUTE I/Y

I/Y = 3.0878

So,Cost of debt when compounded annually is = 6.1755%

So, the change in WACC due to change in tax rate is :

6.1755% ( 0.21- 0.39)

=-1.11%

So, the change in WACC due to the new tax rate adopted is -1.11%.

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