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