Then, these returns need to be adjusted for taxes. Since interest paid on debts is tax-deductible but dividends are not. Debt can therefore only partially shield you from taxes. The after-tax costs associated with debt, equity and dividends would then be 6.5%, 7.5% and 11.25 % respectively.
Finally, to arrive at an overall WACC we simply multiply each respective after-tax cost by its weighting within Capital Co’s capital structure (i.e., 50% x 6%, 10% x 7.5%, 40% x 11.25%) – which in this case works out to be 5%. This figure represents the company’s estimated weighted average cost of capital after accounting for applicable taxes; it can then be used for comparison against actual returns realized from investments or other projects undertaken by the organization so as to assess their economic performance over time.