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Revtek, Inc., has an equity cost of capital of 12% and a debt cost of capital of 6%. Revtek maintains a constant debt-equity ratio of 0.5, and its tax rate is 25%.

a. What is Revtek's WACC given its current debt-equity ratio?

b. Assuming no personal taxes, how will Revtek's WACC change if it increases its debt-equity ratio to 2 and its debt cost of capital remains at 6%?

c. Now suppose investors pay tax rates of 36% on interest income and 15% on income from equity. How will Revteks WACC change if it increases its debt-equity ratio to 2 in this case?

d. Provide an intuitive explanation for the difference in your answers to parts (b) and (c).

a. What is Revtek's WACC given its current debt-equity ratio? b. Assuming no personal taxes, how will Revtek's WACC change if it increases its debt-equity ratio to 2 and its debt cost of capital remains at 6% ? c. Now suppose investors pay tax rates of 36% on interest income and 15% on income from equity. How will Revtek's WACC change if it increases its debt-equity ratio to 2 in this case? d. Provide an intuitive explanation for the difference in your answers to parts (b) and (c). When investors pay higher taxes on interest income than equity income, the tax benefit of leverage is For the same increase in leverage, the in the WACC is smaller in the presence of investor taxes

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