In a world with taxes,which of the following is the rate we should use to evaluate a project with the same risk and the same financing as the firm itself?
A)The weighted-average cost of capital
B)The pre-tax WACC
C)The cost of equity
D)The cost of debt

Question

Quizplus · Accepted Answer

The weighted-average cost of capital (WACC) takes into account both the cost of debt and the cost of equity, and therefore reflects the overall cost of financing for the firm. Since the project has the same risk and financing as the firm itself, using the WACC provides a more accurate measure of the project's profitability by considering the tax implications of the financing structure. The pre-tax WACC (B) does not take into account the tax implications, while the cost of equity (C) and the cost of debt (D) only reflect one type of financing and do not consider the overall cost of capital.

In a World with Taxes,which of the Following Is the Rate