The WACC incorporates the benefit of the ________ by using the firm's ________ cost of capital for debt.
A) interest tax shield; before-tax
B) expense tax shield; before-tax
C) interest tax shield; after-tax
D) expense tax shield; after-tax

Question

Quizplus · Accepted Answer

The interest tax shield is the tax deduction a company receives for interest paid on debt. This benefit can be incorporated into the calculation of the WACC by using the firm's after-tax cost of debt, which reflects the tax savings resulting from the interest tax shield. Therefore, choice C, which mentions the interest tax shield and after-tax cost of capital for debt, is the correct answer. Choice A (before-tax cost of capital for debt) is incorrect because it does not take into account the tax savings from the interest tax shield. Choice B and D (expense tax shield) are also incorrect as there is no such thing as an expense tax shield.

The WACC Incorporates the Benefit of the ________ by Using