Interview Question Help: How does a decrease in tax rate affect WACC?
I understand it increases after-tax cost of debt, because the tax shield benefit is lessened.
However, I don't understand how/why it affects cost of equity.
Mechanically, when you unlever and relever the beta, aren't you using the same tax rate? Say you have a comp set of 5 companies all with a 20% tax rate. Your target company also has a 20% tax rate. If all tax rates go down to 10%, wouldn't you unlever the comp set at 10% tax rate and re lever at the 10% tax rate also? So aren't you getting the same beta even if tax rates stayed the same at 20%?
In a related example, say the tax rate only changes for your target company. You'd unlever the peer set at 20% and relever at the target company's expected tax rate of 10%?
Because WACC is based on cost of debt and cost equity? As long as one is impacted it’ll move WACC
Typically the question will be based around how it changes the DCF - so yes CoD, levered beta, and taxes in projections
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