Subject : Corporate Finance Theory

Please provide me answers with details that is based on the corporate finance theories

Suppose that the government announced an increase in corporate tax rate from 30% to 35%. The tax rate change was not expected by the market participants including corporate managers, analysts and investors. A CFO says, We will not change our existing debt amount in response to the tax rate change. The increased tax rate will reduce our firms Weighted Average Cost of Capital (WACC). The lower WACC implies that our firms free cash flows will be safer under higher tax rate. Further, our firm value estimated by the WACC methods will increase as the discount rate decreases.

Assess the CFOs argument by answering the following two questions:

1. How would WACC change after the tax rate increase? If your answer depends on certain conditions, state the conditions clearly in your report.
2. Does firm value increase if WACC indeed decreases after the tax rate increase?