Fin 571 wiley week 6 10.14 11.20 11.24 12.24 13.11 latest october
Next, we need to adjust these returns for taxes since interest payments on debt are tax deductible whereas dividends paid out on equity are not; this means that debt can only be used as a partially effective shield against taxes. Taking this into consideration and assuming a corporate tax rate of 25%, the after-tax cost associated with each form of financing would be 6%, 7.5% and 11.25% respectively.
Finally, to arrive at an overall WACC we simply multiply each respective after-tax cost by its weighting within Capital Co’s capital structure (i.e., 50% x 6%, 10% x 7.5%, 40% x 11.25%) – which in this case works out to be 5%. This figure represents the company’s estimated weighted average cost of capital after accounting for applicable taxes; it can then be used for comparison against actual returns realized from investments or other projects undertaken by the organization so as to assess their economic performance over time.