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Summary: The Cost of Capital

a$.$ Tax rate $=40\%$

b$.$ Tax rate $=35\%$

c$.$ Tax rate $=25\%$

d$.$ Describe the relationship between changes in the rate of taxation and the WACC. Do you think higher or lower tax rates make debt financing more attractive? Why?

LG$6$

P$9-15$ WACC: Market value weights The market values and after$-$tax costs of various sources of capital used by Ridge Tool are shown in the following table.

$\backslash$table$[[$Source of capital,Market value,Individual cost$],[$Long$-$term debt,$$700,000,5\mathrm{.}3\%],[$Preferred stock,$50,000,12\mathrm{.}0],[$Common stock equity,$650,000,16\mathrm{.}0]]$

a$.$ Calculate the firm's WACC.

b$.$ Explain how the firm can use this cost in the investment decision$-$making process.

LG$3$ LG$4$ LG$5$ LG$6$

P$9-16$ Calculation of individual costs and WACC Carnival Corporation $($CCL$)$ recently sold new bonds at a discount price of $$990.$ The bonds have a short three$-$year maturity, have an $11\mathrm{.}5\%$