Which of the following regarding the weighted-average cost of capital is true?
A) The tax effect of preferred stock dividends should be included in the calculation of weighted-average cost of capital.
B) The tax effect of common stock dividends should be included in the calculation of weighted-average cost of capital.
C) The tax effect of debt should be included in the calculation of the weighted-average cost of capital.
D) Taxes do not affect the weighted-average cost of capital.

Question

Quizplus · Accepted Answer

The tax effect of debt should be included in the calculation of the weighted-average cost of capital. This is because interest payments on debt are tax-deductible, thereby reducing the cost of debt to a company. By including the tax effect of debt in the calculation of WACC, we can adjust for this reduction in cost and have a more accurate representation of the overall cost of capital for the company. The tax effect of preferred stock dividends and common stock dividends should not be included in the calculation of WACC as they are not tax-deductible expenses. Taxes can also affect WACC through the tax rate used in the calculation, but they do not directly impact the components of WACC.

Which of the Following Regarding the Weighted-Average Cost of Capital