finc330 week 7 discussion latest june 2016

GRADED DISCUSSION WEEK 7

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?