Problem:
Brite Lighting Corporation wants to investigate the effect on its cost of capital based on the rate at which the company is taxed. The firm wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with retained earnings is 14% (i.e., rs = 14%), the cost of preferred stock financing is 9% (rps = 9%), and the before-tax cost of debt is 11% (rd = 11%).
Required:
Question 1: Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts (a) to (c) below.
(a) Tax rate = 40%.
(b) Tax rate = 35%.
(c) Tax rate = 25%.
Note: Provide support for your rationale.