Tax cash flows in our calculations of WACC Assess the cost of capital

Tax cash flows in our calculations of WACC Assess the cost of capital

This assignment paper involves tax cash flows in our calculations of WACC. Assess the cost of capital and marginal cost of capital and their implications for capital budgeting.

tax cash flows in our calculations of WACC-Assess the cost of capital

Firstly,  Assess the cost of capital and marginal cost of capital and their implications for capital budgeting.

Secondly,  Apply various risk methodologies to situations involving capital budgeting for the firm.

Thirdly,  Prepare a deliverable that demonstrates the application of financial analysis.

Fourthly, Why do we use after tax cash flows in our calculations of WACC? How does tax rates affect these calculations?

Fifthly, Why do we use after tax cash flows in our calculations of WACC How does tax rates affect these calculations?

Further, As your corporate income tax rate goes up, your company’s WACC goes down since a higher rate produces a larger tax shield.

Additionally, In unincorporated businesses, profits flow to the business owners, who pay income taxes on them.

Thus, the reduced profit means lower taxes for the owners.

How do you calculate after tax cost in WACC?

Cost of Debt after Taxes

To calculate the after-tax cost of debt, subtract a company’s effective tax rate from 1, and multiply the difference by its cost of debt. The company’s marginal tax rate is not used, rather, the company’s state and the federal tax rate are added together to ascertain its effective tax rate.

What tax rate do you use for WACC?

The tax shield

Notice in the WACC formula above that the cost of debt is adjust ed lower to reflect the company’s tax rate. For example, a company with a 10% cost of debt and a 25% tax rate has a cost of debt of 10% x (1-0.25) = 7.5% after the tax adjustment.

Is WACC pre or post tax?

Revised WACC Formula

In this formula the ‘after-tax’ WACC is grossed-up by the corporate tax rate to generate the ‘pre-tax’ WACC. The correct corporate tax rate for estimating the WACC is the marginal tax rate for the future!