(i)Imagine that because of the financial crisis the government had to BAIL out a lot of TOO BIG TO FAIL banks. Due to the resulting budget problems the government considers increasing the corporate tax rate. Describe verbally the impact of the increase in the tax rate on an oil companys WACC and the impact on the NPV and the internal rate of return on a project. Give detailed, complete and clear economic reasons why these figures could increase/decrease! What does this mean for the aggregate economy?
(ii) To remedy the financial crisis the EUROPEAN CENTRAL BANK reduces the benchmark interest rates which corresponds to a reduction in the risk free rate. Describe verbally the impact of this reduction in the risk free rate in an oil companys WACC and the impact on the NPV and the internal rate of return of this project. Provide detailed, complete and clear economic reasons! What does this mean for the aggregate economy?
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