the effect of tax rate on wacc k. bell jewelers 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 40% debt, 10% preferred stock, and 50% common stock. the cost of financing with retained earnings is 10%, the cost of preferred stock financing is 8%, and the before-tax cost of debt financing is 6%. calculate the weighted average cost of capital (wacc) given the tax rate assumptions in parts a to c. a. tax rate

The before-tax cost of debt must be multiplied by the after-tax cost of debt in order to determine the WACC (1 - tax rate). The after-tax cost of debt, for instance, would be 6% * (1 - 0.30) = 4.2% if the tax rate were 30%.

When there is an after-tax cost of debt, the WACC can be calculated by dividing the proportion of each source of funding by the cost of that source of financing, then adding the results.

The WACC calculation formula is as follows:

WACC is calculated as follows: (Proportion of debt x after-tax cost of debt) + (Proportion of preferred stock x cost of preferred stock) + (Proportion of common stock x cost of common stock).

The WACC for K. Bell Jewelers would be as follows using the data given: WACC = (0.40 * 4.2%) + (0.10 * 8%) + (0.50 * 10%) = 2.0% + 0.8% + 5.0% = 8.8%

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