Revtek, Inc., has an equity cost of capital of 12% and a debt cost of capital of
Question:
Revtek, Inc., has an equity cost of capital of 12% and a debt cost of capital of 6%. Revtek maintains a constant debt-equity ratio of 0.5, and its tax rate is 25%.
What is Revtek’s WACC given its current debt-equity ratio?
Assuming no personal taxes, how will Revtek’s WACC change if it increases its debt-equity ratio to 2 and its debt cost of capital remains at 6%?
Now suppose investors pay tax rates of 36% on interest income and 15% on income from equity. How will Revtek’s WACC change if it increases its debt-equity ratio to 2 in this case?
Provide an intuitive explanation for the difference in your answers to parts b and c.
Step by Step Answer:
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Interest, debt, finance, and capital markets are all important concepts in the world of economics and business. Interest is the cost of borrowing money, and it is typically expressed as a percentage of the amount borrowed. Debt is the money that is borrowed, and it has to be repaid with interest. Finance is the study of how individuals, companies, and organizations manage their money and investments. Capital markets are the places where companies and governments can raise money by selling stocks and bonds to investors. These markets play an important role in the overall economy by helping to fund investment and growth.
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