Firm As capital Structure contains 20 percent debt and 80 percent equity. Firm Bs capital structure contains 50 percent debt and 50percent equity. Both firms pay 7 percent annual interest on their debt. The stock of Firm A ha 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 percent, and the expected return on the market portfolio equals 12 percent. Required: 1. Calculate WACC for each firm, assuming there are no taxes (5 marks) 2. Recalculate WACC figures, assuming that the firms face a marginal tax rate of 34 percent. (5 marks) 3. Explain which of the two companies benefited from tax.

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