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Crank
3 years ago
6

Summit Builders has a market​ debt-equity ratio of 0.65 and a corporate tax rate of 40 %​, and it pays 7 % interest on its debt.

Business
1 answer:
avanturin [10]3 years ago
8 0

Answer:

1.103%

Explanation:

Data provided in the question:

Market​ debt-equity ratio = 0.65

Corporate tax rate = 40%

Interest on paid its debt = 7%

Now,

Debt ÷ Equity = 0.65

or

Debt = 0.65 × Equity

Weight of Debt = Debt ÷ (Debt + Equity)

or

= ( 0.65 × Equity ) ÷ ( 0.65 × Equity + Equity )

= 0.65 ÷ 1.65

= 0.3939

also,

Tax shield = Corporate tax rate × Interest paid on its debt

= 0.40 × 0.07

= 0.028

= 2.8%

Therefore,

The interest tax shield from its debt lowers​ Summit's WACC by

= Weight of Debt  × Tax shield

= 0.3939 × 2.8%

= 1.103%

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