easy · Principles of Finance cost-of-capital-structure
What is the primary reason the 'after-tax' cost of debt is used in the WACC instead of the 'pre-tax' cost of debt?
- Interest payments are tax-deductible, reducing the actual cash outflow for the firm.
- Equity dividends are also tax-deductible, but debt is adjusted to balance the formula.
- The pre-tax cost of debt is only relevant for firms that are in bankruptcy.
- It simplifies the calculation when comparing firms in different countries.
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