Question

The weighted average cost of capital represents the annual before−tax percentage cost of the debt.

true/false ?

Answer 1

Answer - False

The weighted average cost of capital represents the annual after−tax percentage cost of the debt. Interest expense, based on accounting standards, is a tax deductible expense. This implies interest expense reduces the tax liability of a firm and hence reduces the cost of debt. Therefore, after tax cost of debt is used in WACC to reflect the cost reduction bought about by the tax deductibility of interest expense.