Company ABC borrows at an annual interest rate of 10%. It faces

an income tax rate of 40%. What is Company ABC's after-tax cost of debt?

2.1.b (5 marks) Company ABC's cost of equity is 15%. Suppose Company ABC has a debt-to-equity ratio of 0.8. What is Company ABC's after-tax WACC?

2.1.c (5 marks) If Company ABC decides to borrow more debts to buy back its shares, the value of Company ABC will A. Increase. B. Decrease.

C. Remain constant. D. cannot be sure with the given information.

2.1.d (5 marks) With perfect capital market, assuming zero bankruptcy costs, what is the optimal level of debt-to-equity ratio to a company facing a 40% income tax rate? A. 0%.

B. 20%. C. 50%. D. 100%. E. cannot be sure with the given information.

Answer rating: 100% (QA)

21a To calculate Company ABCs aftertax cost of debt we need to consider the annual interest rate and the income tax rate Given information Annual inte... View the full answer