Question

Assume that a company is financed 75% with equity and 25% with debt. A decrease in the corporate tax rate of the firm will cause its weighted average cost of capital (WACC) to:_____.
1. Rise.
2. Fall.
3. Stay constant
4. More information is needed

Answer 1

Answer:1. Rise.

Explanation:

The weighted average cost of capital (WACC) is an evaluation of a firm's cost of capital in which every category of capital is proportionately weighted.

Weighted average cost of capital is computed as:

WACC =( Weightage of Equity x Cost of Equity )+  Weightage of Debt x Cost of Debt x(1- Tax Rate )

A decrease in the corporate tax rate of the firm will cause its weighted average cost of capital (WACC) to rise due to an increase in the cost of debt.

hence, the correct option is 1. Rise.

Answer 2

hi! the answer is 1. rise :))