Suppose Big Oil is excused from paying taxes. We calculate it's WACC as 11.27%. WACC Calculation = [(.243 x (1 - 0))*.09] +0.757*.12) = .02187+.09087 = .11271 or 11.27% Question: Now suppose that, after the tax rate has fallen to zero, Big Oil makes a large stock issue and uses the proceeds to pay off all its debt. What would be the cost of equity after the issue? Is "cost of equity, now 12% because the WACC calculation becomes = 0 + (1 *.12)=12% or is this flawed logic? | wacc = Pxa rooreen+ (6 x Poquis) = [.243 x (1 21)9%] + (.757 x 12%) = 10.8% Table 13.3 Data needed to calculate Big Oil's weighted-average cost of capital (dollar values in millions) Security Type Capital Structure Required Rate of Return Debt D=$ 385.7 D/V = 0.243 debt - 0.09, or 9% Common stock E = $1,200.0 E/V = 0.757 requity - 0.12, or 12% Total V = $1,585.7 Vote: Corporate tax rate = T = 21. We assume that the interest rate on Big Oil's bank debt is the same as on its bonds. Suppose Big Oil is excused from paying taxes. We calculate it's WACC as 11.27%. WACC Calculation = [(.243 x (1 - 0))*.09] +0.757*.12) = .02187+.09087 = .11271 or 11.27% Question: Now suppose that, after the tax rate has fallen to zero, Big Oil makes a large stock issue and uses the proceeds to pay off all its debt. What would be the cost of equity after the issue? Is "cost of equity, now 12% because the WACC calculation becomes = 0 + (1 *.12)=12% or is this flawed logic? | wacc = Pxa rooreen+ (6 x Poquis) = [.243 x (1 21)9%] + (.757 x 12%) = 10.8% Table 13.3 Data needed to calculate Big Oil's weighted-average cost of capital (dollar values in millions) Security Type Capital Structure Required Rate of Return Debt D=$ 385.7 D/V = 0.243 debt - 0.09, or 9% Common stock E = $1,200.0 E/V = 0.757 requity - 0.12, or 12% Total V = $1,585.7 Vote: Corporate tax rate = T = 21. We assume that the interest rate on Big Oil's bank debt is the same as on its bonds