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Question

When calculating the weighted average cost of capital, the costs of which of the following types of capital include a ($1 - T$) multiplier, where $T$ is the effective tax rate?

a. Debt capital

b. Equity capital

c. Both (a) and (b)

d. Neither (a) nor (b)

Solution

VerifiedAnswered 1 year ago

Answered 1 year ago

Step 1

1 of 3The weighted average cost of capital $(WACC)$ has a formula $WACC=(E/V)i_e+(D/V)i_d(1-itr)$ where $E$ is the firm’s total equity, $D$ is the firm’s total debt and leases, $V$ is the firm’s total invested capital, $i_e$ is the cost of equity or expected rate of return on equity, $i_d$ is the cost of debt or expected rate of return on borrowing and $itr$ is the corporate tax rate.

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