Question

If Its current tax rate is 40%, how much higher will Cute Camel's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by Issuing new common stock instead of raising the funds through retained eamings? (Note: Round your answer to two decimal places.)

A. 0.64%
B. 0.70%
C. 0.77%
D. 0.86%

Answer 1

If Cute Camel issues new common stock instead of using retained earnings, its weighted average cost of capital (WACC) will be higher due to the non-tax-deductibility of equity costs.

Step-by-step explanation:

To calculate the difference in Cute Camel's weighted average cost of capital (WACC) if it issues new common stock instead of using retained earnings, we need to consider the tax rate. If the current tax rate is 40%, then the cost of issuing new common stock will be higher. This is because the cost of equity for issuing new common stock is not tax-deductible, whereas the cost of retained earnings is already after-tax.

To determine the exact increase in WACC, we need more information about the specific costs of equity and debt. Without that information, we cannot calculate the precise percentage increase. However, we can infer that the WACC will be higher than if the funds were raised through retained earnings due to the non-tax-deductibility of equity costs.