Question

When computing WACC, you should use the: Multiple Choice pretax yield to maturity because it considers the current market price of debt. pretax cost of debt because it is the actual rate the firm is paying its bondholders. pretax cost of debt because most corporations pay taxes at the same tax rate. aftertax cost of debt because interest is partially, if not fully, tax deductible. current yield because it is based on the current market price of debt. g

Answer 1

Answer:

after tax cost of debt because interest is partially, if not fully, tax deductible.

Explanation:

The debt requires fixed payment in the form of interest as attached to it. Also, since it is mandatory, it is an expense and not an appropriation of profits or earnings.

Further as the tax is payed on income after providing for all expenses, that is after providing for the interest expense also, the tax expense is reduced because of reduction in profit from interest expense.

Thus, on the net effect the company's cost of debt is the payment of interest less the tax benefit.