How does the Tax rate relate to MCC OR rather how does an increase in tax rate lead to a decrease in MCC (as the solution to a schwesser question suggests) Baffled…
The cost of debt is taken after taxes. So an increase in taxes results in a decrease in the aftertax cost of debt Kd * (1-T)
Also, cost of equity and cost of preferred shares are not impacted by a tax rate change, so overall WACC decreases as long the firm has debt oustanding.
ahhhhhhhh duh. thanks!