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The effect of tax rate on WACC. Equity Lighting Corp. wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 30% debt, 15% preferred stock, and 55% common stock. The cost of financing with retained earnings is 17%, the cost of preferred stock financing is 11% and the before tax cost of dbt financing is 7%. Calculate the weighted average cost of capital (WACC) given a tax rate of 35%.

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The expert calculates the weighted average cost of capital.

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Please see the attached file:

Step 1: Calculate the after tax cost of debt

Marginal Tax rate T = 35% (Corporate Tax Rate)
Before tax cost of debt= kd= 7.00%
After tax cost of ...

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