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    Tax rate

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    Heavy Metal Corp is a steel manufacturer that finances its operations with 40% debt, 10% preferred stock, and 50% equity. The interest rate on the company's debt is 11%. The preferred stock pays an annual dividend of $2 and sells for $20 a share. The company's common stock trades at $30 a share, and its current dividend (D0) of $2 a share is expected to grow at a constant rate of 8% per year. The flotation cost of external equity is 15% of the dollar amount issued, while the flotation cost on preferred stock is 10%. The company estimates that its WACC is 12.3%. Assume that the firm will not have enough retained earnings to fund the equity portion of its capital budget. WHAT IS THE COMPANY'S TAX RATE?

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    Solution Preview

    We can calculate the tax rate using the WACC formula
    WACC = Proportion of debt X before tax cost of debt X (1-tax rate) + Proportion of preferred stock X cost of preferred stock + Proportion of common stock X cost of common stock
    We are given
    WACC = 12.3%

    Proportion of ...

    Solution Summary

    The solution explains how to calculate the company's tax rate