Firm As capital structure contains 20% debt and 80% equity. Firm Bs capital structure contains 50% debt and 50% equity. Both firms pay 7% annual interest on their debt. The stock of Firm A has a beta of 1.0 and the stock of Firm B has a beta of 1.375. The risk free rate of interest equals 4%, and the expected return on the market portfolio equals 12%.

Required:

a. Calculate the WACC for each firm, assuming there are no taxes.

b. Recalculate the WACC for each firm, assuming they face a tax rate of 30%.

c. Explain how taking taxes into account in part b) changes your answer found in part a).

Please show your calculations clearly.