Which of the following is the correct algebraic expression of WACC when there is a debt shield tax?

Question

Quizplus · Accepted Answer

The correct expression for WACC with debt shield tax is the one that includes the tax shield benefit. This means that the cost of debt is adjusted by the tax rate, since interest payments are tax deductible. The correct expression is:

WACC = wSEBErE + wD(1 - TC)RDwhere:

wE = the weight of equity
wD = the weight of debt
rE = the cost of equity
rD = the cost of debt
TC = the corporate tax rate
EBE = the enterprise value of equity
D = the enterprise value of debt

Option B is the only one that includes the adjustment for tax shield benefit, with (1-TC) being the factor that reduces the cost of debt.

Which of the Following Is the Correct Algebraic Expression of WACC