The effect of tax rate on WACC Rayyan Games, an IT firm, 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, 30% preferred stock, and 30% common stock. The cost of financing with retained earnings is 12%, 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 = 40,

b. Tax rate = 35,

c. Tax rate = 15,

d. Describe the relationship between changes in the rate of taxation and the WACC.

Do you think higher or lower tax rates make debt financing more attractive? Why?