Question - Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected rate of return to shareholders at about 12 percent. It has also issued long-term bonds at an interest rate of 7 percent. It pays tax at a marginal rate of 35 percent.
a. What is Omega's after-tax WACC?
b. How much higher would WACC be if Omega used no debt at all? Hint: For this problem you can assume that the firm's overall beta (_A) is not affected by its capital structure or the taxes saved because debt interest is tax-deductible.