The weighted average cost of capital formula (WACC) shown below is the accepted method of computing a firm’s cost of capital.
WACCadj =
E x Re + PS x Rps + D x Rd X (1 – Tc) V V V
Where:
E = Equity dollars of financing
PS = Preferred Stock dollars of financing
D = Debt (bond) dollars of financing
V = Total financing = E +PS +D
Re = % Cost of Common Stock
Rps = % Cost of Preferred Stock
Rd = % Cost of Debt after tax
Tc = Effective tax rate
After reviewing this formula, your reading assignments and the instructor’s PowerPoint presentation, in a one paragraph posting, answer the following questions and provide a short supporting rationale for each answer. The answer does not require a quantitative solution What impact will the following company actions have on the company’s weighted average cost of capital (WACC):
1. An Increase in the company’s corporate tax rate?
2. An Increase in the company’s flotation cost?
3. An increase in the company’s dividend?
Can you demonstrate your answer mathematically?
