The after-tax weighted average cost of capital is determined 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 (WACC) is calculated by adding the weighted average cost of equity to the weighted average after-tax cost of debt. This is because the after-tax cost of debt is lower than the before-tax cost of debt, and since the cost of equity remains the same, the overall WACC will decrease when factoring in the after-tax cost of debt. Option A is incorrect because it multiplies the after-tax cost of debt with the cost of equity. Option B is incorrect because it only considers the before-tax cost of debt. Option D is incorrect because it involves dividing two averages, which is not the correct calculation for WACC.

The After-Tax Weighted Average Cost of Capital Is Determined By