The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC.

Question

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The after-tax cost of debt is used as the component cost of debt for purposes of developing the firm's WACC, not the before-tax cost. This is because interest payments on debt are tax deductible, which reduces the effective cost of debt for the firm.

The Before-Tax Cost of Debt, Which Is Lower Than the After-Tax