## Analysis of the Question The question asks for the appropriate **tax rate** to use in the calculation of the debt component of LilyMac’s **Weighted Average Cost of Capital (WACC)**. ### Key Points - For the debt component in WACC, the **tax rate** should be the firm's **marginal tax rate**. - The marginal tax rate is the rate paid on the next dollar of taxable income, reflecting the actual tax benefit of interest deductibility. ### Feedback Interpretation - The provided answer was **34%**, but it is marked as *not entirely correct*. - This suggests that **34%** is likely not the correct marginal tax rate for this scenario. ### Common Corporate Tax Rates - In the United States, the corporate tax rate changed to **21%** in 2018 (previously 34% or 35%). - Unless otherwise specified, the current standard federal corporate tax rate is **21%**. ## Conclusion **The appropriate tax rate to use in the WACC calculation is the firm's current marginal tax rate, which is typically 21% for U.S. corporations as of 2018.** --- ### Correct Answer | Tax rate | |----------| | 21 % | --- #### Note: If the company is not in the U.S. or if there is a different tax environment specified, use the relevant marginal tax rate for that location and period. If more information is provided in your course or problem, use that rate.

# Objective Determine the appropriate tax rate to use in the calculation of the debt component of LilyMac Photography's Weighted Average Cost of Capital (WACC). ## Available Data - Expected EBIT: $96,000 per year - Bonds outstanding: 400 - Coupon rate of bonds: 4% - Corporate tax rates: Historically 34%, currently 21% (as of 2018) ## Approach 1. **Identify the tax rate needed**: The marginal tax rate that applies to LilyMac Photography. 2. **Understand tax implications**: The interest on debt is tax-deductible, which lowers the effective cost of debt. ## Supporting Explanation - The tax rate used in WACC calculations should be the **marginal tax rate**. This is the rate at which the next dollar of taxable income is taxed. - In the U.S., the corporate tax rate was reduced to **21%** in 2018. Unless specified otherwise, this is the rate to use. ## Conclusion The appropriate tax rate to be used in the WACC calculation for LilyMac Photography is **21%**. --- ### Final Answer | Tax rate | |----------| | 21 % |