In the firm's WACC estimate, cost of debt is
A) calculated using CAPM.
B) weighted average of the principles of different debt components.
C) adjusted with the effective tax rate because interest payments are deductible item.
D) equivalent only to the interest on firm's market debt securities.

Question

Quizplus · Accepted Answer

Cost of debt is typically calculated as the interest rate paid by the firm on its debt securities. However, since interest payments are tax-deductible, the effective cost of debt is lower than the nominal interest rate. Therefore, cost of debt is adjusted with the effective tax rate to reflect this tax shield benefit.

In the Firm's WACC Estimate, Cost of Debt Is