Question

To understand the advantage of debt capital from a tax perspective in the United States, determine the before-tax and approximated after-tax weighted average costs of capital if a project is funded 20%–80% (D-E mix) with debt capital borrowed at 11% per year. A recent study indicates that corporate equity funds earn 20% per year and that the effective tax rate is 38% for the year.

The tax advantage reduces the WACC from_______% to __________% per year

Answer 1

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