(Cost of capital) The Query Company has identified two alternative capital structures. If the firm borrows 15% of the value of the firm, it can borrow the money at rd = 10%, and the shareholders will have a required return of re = 18%. If the firm borrows 45% of the value of the firm, it can borrow the money at rd = 12%, and the shareholders will have a required return of re = 23.21%. Query pays corporate taxes at the rate of 35%. If Query is operating in an essentially perfect capital market except for taxes, are the taxes approximately symmetric, or are they asymmetric?
a. What is the WACC with 15% debt?
b. What is the WACC with 45% debt?
c. Are the taxes approximately symmetric, asymmetric where debt is favorited, or symmetric equity is favored?