Question Details

Omega Corporation has 10 million shares outstanding, now trading at $55 per share. 
The firm has estimated the expected rate of return to shareholders at about 12 percent. 
It has also issued long-term bonds at an interest rate of 7 percent. It pays tax at a marginal rate of 35 percent. 
a. What is Omega- after-tax WACC? 
b. How much higher would WACC be if Omega used no debt at all? Hint: For this problem you can assume that the firm- overall beta (_A) is not affected by its capital structure or the taxes saved because debt interest is tax-deductible