Summit Builders has a market debt-equity ratio of 0.65 and a corporate tax rate of 40 % , and it pays 7 % interest on its debt.

The interest tax shield from its debt lowers Summit's WACC by what amount?

1.103%

Explanation:

Data provided in the question:

Market debt-equity ratio = 0.65

Corporate tax rate = 40%

Interest on paid its debt = 7%

Now,

Debt : Equity = 0.65

or

Debt = 0.65 * Equity

Weight of Debt = Debt : (Debt + Equity)

or

= (0.65 * Equity) : (0.65 * Equity + Equity)

= 0.65 : 1.65

= 0.3939

also,

Tax shield = Corporate tax rate * Interest paid on its debt

= 0.40 * 0.07

= 0.028

= 2.8%

Therefore,

The interest tax shield from its debt lowers Summit's WACC by

= Weight of Debt * Tax shield

= 0.3939 * 2.8%

= 1.103%