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Company X has  debt to equity ratio equal to one. Its cost of equity is 10% and its cost of debt is 5%. Keeping fixed the company's capital structure, how does a cut in the corporate tax rate from 20% to 10% affect X's weighted average cost of capital (WACC)?     The WACC is reduced since the tax cut makes it easier to raise finance     It increases the WACC from 7% to 7.25%     It reduces the WACC from 7.5% to 7.25%     The WACC is unaffected

Company X has  debt to equity ratio equal to one. Its cost of equity is 10% and its cost of debt is 5%. Keeping fixed the company's capital structure, how does a cut in the corporate tax rate from 20% to 10% affect X's weighted average cost of capital (WACC)?     The WACC is reduced since the tax cut makes it easier to raise finance     It increases the WACC from 7% to 7.25%     It reduces the WACC from 7.5% to 7.25%     The WACC is unaffected

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter17: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 7P
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Company X has  debt to equity ratio equal to one. Its cost of equity is 10% and its cost of debt is 5%. Keeping fixed the company's capital structure, how does a cut in the corporate tax rate from 20% to 10% affect X's weighted average cost of capital (WACC)?

   

The WACC is reduced since the tax cut makes it easier to raise finance
   

It increases the WACC from 7% to 7.25%
   

It reduces the WACC from 7.5% to 7.25%
   

The WACC is unaffected
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