Question

A decrease in a levered firm’s tax rate will: Group of answer choices decrease the cost of preferred stock decrease the firm’s WACC increase both the cost of preferred stock and debt increase the firm’s cost of capital

Answer 1

Answer:

increase the firm’s cost of capital

Explanation:

In simple words, while computing the firms cost of capital, the cost of debt is calculated after deducting the tax rate. Hence, the tax rate actually helps company's overall cost of capital to decrease. In case, the tax rate decreases the multiplying number of before tax rare will be lower, hence the WACC will increase due to increase in cost of debt.