If a company’s tax rate increases, I understand that would make the tax shield from debt more valuable, so the WACC would theoretically decrease, but wouldn’t an increase in taxes paid lower the PV of future earnings and thus the value of its equity as well?
wouldn’t that offset the decrease in WACC?
The question to ask is whether an increase in the tax rate will increase or decrease the required rate of return on common (and preferred) equity, not whether it will increase or decrease future earnings.
I like your conclusion, however: that increase in the required return on equity should offset, to some extent, the decrease in WACC from the after-tax cost of debt.
thanks for the response.
the reason I asked is because the same question was in a schweser concept checker and the answer said a tax rate increase would decrease the wacc (not numbers, just a blanket statement) and it didnt seem like it should be so cut and dry