Brite Lighting Corporation wants to investigate the effect on its cost of capital based on the rate at which the company is taxed. The firm wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with retained earnings is 14% (i.e., rs = 14%), the cost of preferred stock financing is 9% (rps = 9%), and the before-tax cost of debt is 11% (rd = 11%).
Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts (a) to (c)
below. (a) Tax rate = 40%. (b) Tax rate = 35%. (c) Tax rate = 25%.