Question

Keys Printing plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 45.00%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?

Answer 1

Answer:

The WACC change if the new tax rate was adopted is - 0.35%

Explanation:

For computing the WACC change, first we have to determine the after tax cost of debt by applying the 40% and 45% tax rate which is shown below:

After tax Cost of debt = Cost of debt × ( 1- tax rate)

For 40% tax rate, it would be

= 7% × ( 1 - 40%)

= 4.2%

For 45% tax rate, it would be

= 7% × ( 1 - 45%)

= 3.85%

The change in WACC would be

= 3.85% - 4.2%

= - 0.35%