Smart Finance Corporation wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The company wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with equity is 12%, the cost of preferred stock financing is 7%, and the before-tax cost of debt financing is 5%. Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts a to c.
a. Tax rate=50%
b. Tax rate =40%
c. Tax rate=30%
d. Describe the relationship between changes in the taxation rate and the weighted average cost of capital.