The cost of capital for a firm, rWACC, in a tax-free environment is:
A) Equal to the expected EBIT divided by market value of the unlevered firm
B) Equal to rA, the rate of return for that business risk class
C) Equal to the overall rate of return required on the levered firm
D) All of the above

Question

Quizplus · Accepted Answer

In a tax-free environment, the cost of capital for a firm (rWACC) is equal to the rate of return for that business risk class (rA), which is also the overall rate of return required on the levered firm, and it can be expressed as the expected EBIT divided by the market value of the unlevered firm.

The Cost of Capital for a Firm, RWACC, in a Tax-Free