The weighted average cost of capital formula (WACC) shown below is the accepted method of computing a firm’s cost of capital.

The weighted average cost of capital formula (WACC) shown below is the accepted method of computing a firm’s cost of capital.

WACCadj = E X Re + PS X Rps + D X Rd X ( 1 – Tc)

V V V

Where:

E = Equity dollars of financing

PS = Preferred Stock dollars of financing

D = Debt (bond) dollars of financing

V = Total financing = E +PS +D

Re = % Cost of Common Stock

Rps = % Cost of Preferred Stock

Rd = % Cost of Debt after tax

Tc = Effective tax rate

After reviewing this formula, your reading assignments and the instructor’s PowerPoint presentation, in a one paragraph posting, answer the following questions and provide a short supporting rationale for each answer. The answer does not require a quantitative solution

What impact will the following company actions have on the company’s weighted average cost of capital (WACC):

1. An Increase in the company’s corporate tax rate?

2. An Increase in the company’s flotation cost?

3. An increase in the company’s dividend?

Can you demonstrate your answer mathematically?

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