One should determine the after-tax weighted average cost of capital by
A)multiplying the weighted average after-tax cost of debt by the weighted average cost of equity.
B)adding the weighted average before-tax cost of debt to the weighted average cost of equity.
C)adding the weighted average after-tax cost of debt to the weighted average cost of equity.
D)dividing the weighted average before-tax cost of debt to the weighted average cost of equity.

Question

Quizplus · Accepted Answer

The after-tax weighted average cost of capital is calculated by adding the weighted average after-tax cost of debt to the weighted average cost of equity. This is because the after-tax cost of debt is the cost that the firm actually incurs to borrow funds, and the cost of equity is the return that the firm must provide to its shareholders. Both of these costs should be considered in determining the overall cost of capital for the firm.

One Should Determine the After-Tax Weighted Average Cost of Capital