[charnisha]

Explain how the federal income tax structure impacts a business decision to finance with use of debt vs. equity?

[ake_finance]

Cost of debt after tax = cost of debt * (1-T)
Higher income tax will induce the firm to use more debt because debt is tax deductable
and use more debt will reduce the WACC of firm.Suppose loan interest = 6% and tax=30%, firm' s cost of debt after tax will equal 4.2%.Now, if tax increase to 50% ,firm' s cost of debt after tax will equal 3.00%. You can see that tax can reduce the cost of debt.
Note that WACC is weight everage cost of capital of the firm.
Generally, firm want to reduce the WACC because of the lower of the WACC, firm value will increase.

[ake_finance]

In Addition, WACC compose of debt and equity, I conclude that with higher tax firm prefre debt to equity since use more debt will reduce WACC