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The Weighted Average Cost of Capital is calculated using all the different costs in an after-tax...

The Weighted Average Cost of Capital is calculated using all the different costs in an after-tax basis. However, not all the components of the WACC require an adjustment for taxes. What component of the capital structure needs to be adjusted by taxes for the WACC calculation?

Retained Earnings

Common Equity

Cash

Long Term Debt

Preferred Equity

Solutions

Expert Solution

Correct answer is long term debt

Explanation : for long-term debt interest payments are tax deductible so we get tax sheild on interest payments so we need to adjust it tk after tax

In case of preffred stock and equity dividend payments are appropriation of profits so they are not tax deductible so they are not adjusted for rax

jeff jeffy answered 2 years ago
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