The difference between the weighted-average cost of capital (WACC) and the pre-t
ID: 2779105 • Letter: T
Question
The difference between the weighted-average cost of capital (WACC) and the pre-tax (unlevered) WACC is
A.the weighted-average cost of capital multiplies the cost of debt by (1-tax rate) and the pre-tax WACC does not.
B.the weighted-average cost of capital is based on the after-tax cost of equity and the pre-tax WACC is based on the after-tax cost of debt.
C.the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure, and the pre-tax WACC does not.
D.the weighted-average cost of capital multiplies the cost of equity and the cost of debt by (1-tax rate) and the pre-tax WACC does not.
A.the weighted-average cost of capital multiplies the cost of debt by (1-tax rate) and the pre-tax WACC does not.
B.the weighted-average cost of capital is based on the after-tax cost of equity and the pre-tax WACC is based on the after-tax cost of debt.
C.the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure, and the pre-tax WACC does not.
D.the weighted-average cost of capital multiplies the cost of equity and the cost of debt by (1-tax rate) and the pre-tax WACC does not.
Explanation / Answer
The correct answer is
A.the weighted-average cost of capital multiplies the cost of debt by (1-tax rate) and the pre-tax WACC does not
In Pre tax Wacc we do not take the effect of taxed while calculating the cost of debt etc. It is pre taxes and while in WACC we takw the effect of WACC.