Unleverage Firm and After-tax WACC
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Suppose a firm is unleveraged and has an unleveraged required return, r, of 15%. The firm borrows 30% of the value of the firm at rd = 8%. Because of the financial leverage, re becomes 18%. The firm pays corporate taxes at a rate of 35% but otherwise operates in perfect capital market. What is the firm's WACC?
a) Assuming the firm is operating in a perfect capital market (including no taxes)
b) Assuming there are only corporate taxes at a rate of 35% in an otherwise perfect capital market.
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Solution Summary
How to calculate After Tax Weighted Average cost of capital is determined.
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Weighted Average Cost of Capital (WACC) is calculated as follows
WACC = rd * (1-tr) * d/v + re * e/v
where, rd = Cost of Debt
re = Cost of Equity
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