Series 79 practice questionmediumWACC and Tax Rate
If the corporate tax rate increases, what is the expected impact on the WACC, assuming the capital structure is unchanged?
- AWACC increases because cost of equity rises.
- BWACC increases because interest expense rises.
- CWACC remains the same because tax rates do not affect it.
- DWACC decreases due to a greater tax shield on debt.✓ Correct answer
Explanation
Why D — WACC decreases due to a greater tax shield on debt.
Higher tax rates increase the benefit of the interest tax shield, lowering the after-tax cost of debt and thereby reducing WACC. Interest expense itself does not rise, and the cost of equity is not directly affected.
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