Q2. Purple Inc. has 10 million shares outstanding, now trading at 75 per share. It has also issued 200 million long-term bonds at an interest rate of 8 percent. The firm estimated the expected rate of return for shareholders to be 20 percent in the levered company. a) If there is no corporate tax applicable to this company, what is Purple Inc.s WACC?

b) Now assume Purple Inc. pays tax at a marginal rate of 35 percent. What is the companys after-tax WACC?

c) How much higher would the WACC be if the company used no debt at all? (For this problem you can assume that the firms overall asset return is not affected by its capital structure or by interest tax shields).