Describe the relationship between changes

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Equity Lighting Corp. wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with retained earnings is 14%, the cost of preferred stock financing is 9%, and the before-tax cost of debt financing is 11%. Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts a to c.

a. Tax rate = 40%

b. Tax rate = 35%

c. Tax rate = 25%

d. Describe the relationship between changes in the rate of taxation and the weighted average cost of capital.

Reference no: EM131107355

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