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 Weighted Average Cost of Capital (WACC) because interest payments are tax-deductible, reducing the effective cost of debt.

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