The difference between the weighted-average cost of capital (WACC)and the pre-tax (unlevered)WACC is:
A)the weighted-average cost of capital is based on the after-tax cost of equity and the pre-tax WACC is based on the after-tax cost of debt.
B)the weighted-average cost of capital multiplies the cost of equity and the cost of debt by (1-tax rate)and the pre-tax WACC does not.
C)the weighted-average cost of capital multiplies the cost of debt by (1-tax rate)and the pre-tax WACC does not.
D)the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure,and the pre-tax WACC does not.

Question

Quizplus · Accepted Answer

The weighted-average cost of capital (WACC) is the average cost of capital for a firm. It is calculated by multiplying the cost of each component of capital (debt and equity) by its weight in the capital structure. The pre-tax (unlevered) WACC is the WACC calculated without taking into account the tax savings from debt financing. The difference between the WACC and the pre-tax WACC is the tax savings from debt financing. This is because the WACC multiplies the cost of debt by (1-tax rate), while the pre-tax WACC does not.

The Difference Between the Weighted-Average Cost of Capital (WACC)and the Pre-Tax