Problem 18-28
	Revtek, Inc., has an equity cost of capital of 12% and a debt cost of capital of 6%. Revtek maintains a constant debt-equity ratio of 0.5, and its tax rate is 35%.
	a.	What is Revtek?s WACC given its current debt-equity ratio?
	b.	Assuming no personal taxes, how will Revtek?s WACC change if it increases its debt-equity ratio to 2 and its debt cost of capital remains at 6%?
	c.	Now suppose investors pay tax rates of 40% on interest income and 15% on income from equity. How will Revtek?s WACC change if it increases its debt-equity ratio to 2 in this case?
	d.	Provide an intuitive explanation for the difference in your answers to parts (b) and (c).
		Cost of equity	12.00%
		Cost of debt	6.00%
		Debt-equity ratio	0.50
		Tax rate	35.00%
	a.	What is Revtek?s WACC given its current debt-equity ratio?
		Equity-to-value ratio
		Debt-to-value ratio
		WACC
	b.	Assuming no personal taxes, how will Revtek?s WACC change if it increases its debt-equity ratio to 2 and its debt cost of capital remains at 6%?
		Debt to equity ratio	2.00
		Equity-to-value ratio
		Debt-to-value ratio
		Unlevered return
		WACC
	c.	Now suppose investors pay tax rates of 40% on interest income and 15% on income from equity. How will Revtek?s WACC change if it increases its debt-equity ratio to 2 in this case?
		Personal tax rate
		on dividend income	15.00%
		Personal tax rate
		on interest income	40.00%
		After-tax cost of debt
		WACC before
		change in D/E
		rE with higher leverage
		WACC after
		change in D/E
	d.	Provide an intuitive explanation for the difference in your answers to parts (b) and (c).
		When investors pay higher taxes on interest income than equity income, the
		tax benefit of leverage is
		For the same increase in leverage, the		in the WACC is
		smaller in the presence of investor taxes.
Requirements
1.	To calculate the company?s WACC under the assumptions in part (a), you will use the formula: r_wacc = (Equity/Value) * r_Equity + (Debt/Value) * r_Debt * (1 ? Tax rate). To simplify the formula entry and to have these values available for future use, you will first calculate the equity-to-value and debt-to-value ratios.
In cell D17, by using cell references, calculate the equity-to-value ratio (1 pt.).
2.	In cell D18, by using cell references, calculate the debt-to-value ratio (1 pt.).
3.	In cell D19, by using cell references, calculate the company?s WACC (1 pt.).
4.	In cell D25, by using cell references, calculate the equity-to-value ratio (1 pt.).
5.	In cell D26, by using cell references, calculate the debt-to-value ratio (1 pt.).
6.	In cell D27, by using cell references, calculate the unlevered return (pretax WACC) (1 pt.).
7.	In cell D28, by using cell references, calculate the company?s WACC (1 pt.).
8.	In cell D37, by using cell references, calculate the after-tax cost of debt (1 pt.).
9.	In cell D39, by using cell references, calculate the company?s WACC (before the change in debt-to-equity ratio) (1 pt.).
10.	In cell D40, by using cell references, calculate the new equity cost of capital (with higher leverage) (1 pt.).
11.	In cell D42, by using cell references, calculate the company?s WACC (1 pt.).
12.	In cell D47, type either the word increased or the word reduced (1 pt.). In cell E48, type either the word decline or the word rise (1 pt.).

Problem 18-28 Revtek, Inc., has an equity cost of capital of 12% and a debt cost of capital of 6%. Revtek m constant debt-equity ratio of 0.5, and its tax rate is 35%. a. What is Revtek's WACC given its current debt-equity ratio? b. Assuming no personal taxes, how will Revtek's WACC change if it increases its debtand its debt cost of capital remains at 6%? c. Now suppose investors pay tax rates of 40% on interest income and 15% on income f will Revtek's WACC change if it increases its debt-equity ratio to 2 in this case? d. Provide an intuitive explanation for the difference in your answers to parts (b) and (c) Cost of equity Cost of debt Debt-equity ratio Tax rate 12.00% 6.00% 0.50 35.00% a. What is Revtek's WACC given its current debt-equity ratio? Equity-to-value ratio Debt-to-value ratio WACC b. Assuming no personal taxes, how will Revtek's WACC change if it increases its debtand its debt cost of capital remains at 6%? Debt to equity ratio 2.00 Equity-to-value ratio Debt-to-value ratio Unlevered return WACC c. Now suppose investors pay tax rates of 40% on interest income and 15% on income f will Revtek's WACC change if it increases its debt-equity ratio to 2 in this case? Personal tax rate on dividend income Personal tax rate on interest income 15.00% 40.00% After-tax cost of debt WACC before change in D/E rE with higher leverage WACC after change in D/E d. Provide an intuitive explanation for the difference in your answers to parts (b) and (c) When investors pay higher taxes on interest income than equity income, the tax benefit of leverage is For the same increase in leverage, the in the WACC is smaller in the presence of investor taxes. Requirements 1. To calculate the company's WACC under the assumptions in part (a), you will use the r_wacc = (Equity/Value) * r_Equity + (Debt/Value) * r_Debt * (1 - Tax rate). To formula entry and to have these values available for future use, you will first calculate value and debt-to-value ratios. In cell D17, by using cell references, calculate the equity-to-value ratio (1 pt.). 2. In cell D18, by using cell references, calculate the debt-to-value ratio (1 pt.). 3. In cell D19, by using cell references, calculate the company's WACC (1 pt.). 4. In cell D25, by using cell references, calculate the equity-to-value ratio (1 pt.). 5. In cell D26, by using cell references, calculate the debt-to-value ratio (1 pt.). 6. In cell D27, by using cell references, calculate the unlevered return (pretax WACC) ( 7. In cell D28, by using cell references, calculate the company's WACC (1 pt.). 8. In cell D37, by using cell references, calculate the after-tax cost of debt (1 pt.). 9. In cell D39, by using cell references, calculate the company's WACC (before the chan equity ratio) (1 pt.). 10. In cell D40, by using cell references, calculate the new equity cost of capital (with hig pt.). 11. In cell D42, by using cell references, calculate the company's WACC (1 pt.). 12. In cell D47, type either the word increased or the word reduced (1 pt.). In cell E48, word decline or the word rise (1 pt.). of capital of 6%. Revtek maintains a o? ange if it increases its debt-equity ratio to 2 come and 15% on income from equity. How ratio to 2 in this case? answers to parts (b) and (c). o? ange if it increases its debt-equity ratio to 2 come and 15% on income from equity. How ratio to 2 in this case? answers to parts (b) and (c). quity income, the in the WACC is in part (a), you will use the formula: _Debt * (1 - Tax rate). To simplify the use, you will first calculate the equity-to- o-value ratio (1 pt.). value ratio (1 pt.). y's WACC (1 pt.). o-value ratio (1 pt.). value ratio (1 pt.). ed return (pretax WACC) (1 pt.). y's WACC (1 pt.). x cost of debt (1 pt.). y's WACC (before the change in debt-to- uity cost of capital (with higher leverage) (1 y's WACC (1 pt.). duced (1 pt.). In cell E48, type either the