To understand the advantage of debt capital from a tax perspective in the United States,determine the before-tax and approximated after-tax weighted average costs of capital if aproject is funded 25%-75% (D-E mix) with debt capital borrowed at 12% per year. A recent studyindicates that corporate equity funds earn 21% per year and that the effective tax rate is31% for the year.

The tax advantage reduces the WACCfrom% to% per year.