Question

Other things equal, a lower tax rate leads to Select one:

a. a higher cost of equity
b. a lower cost of equity
c. a higher WACC
d. a lower WACC

Answer 1

Lower tax rates generally result in a lower cost of equity and a lower WACC. A rise in the supply of funds in the financial market will typically lead to a decline in interest rates.

Step-by-step explanation:

The question of how tax rates impact the cost of equity and Weighted Average Cost of Capital (WACC) involves financial concepts. A lower tax rate typically leads to a lower cost of equity, as the after-tax cost to the company decreases. This also translates to a lower WACC, since WACC is a blend of the costs of debt and equity financing, both of which are influenced by tax rates.

Regarding the impact of changes in the financial market on interest rates, when there is a rise in supply of funds (e.g., when savings increase or central banks inject money into the economy), this can lead to a decline in interest rates if demand remains constant.