To determine this after-tax rate of return we will need to first calculate what Shawhan’s pre-tax rate of return must be based on their current capital structure and required returns on each component. To do this we can use the weighted average cost of capital (WACC) formula which takes into account all sources of financing: WACC = (E/V) x Re + (D/V) x Rd x (1 – Tc). Here, E is equity and D is debt. V represents the total value. Re is the required return for Equity. Rd is a required return for Debt. Tc is tax rate.

Using our values in our equation above, WACC = {(0.5 x 0.18)+(0.3 x 0.10)}x(1 – 0.40); WACC = 12%. It means Shawhan must earn an annual rate of return of 12% before taxes in order to maintain the current value of their business.

We can also calculate the after-tax profit margin that Shawhan must achieve to be able to maintain its profitability by using this equation: After Tax Rate = Before Tax Rate/[1-(Tax Rate)]. The following is the result: Tax rate = 12 % [1 – 40%] = 20%. Shawhan Supply, based on these assumptions, must achieve a rate after tax or a return of equal to 20 % if it so desires.