Accredited In Business Valuation (ABV) Exam

In a WACC calculation, why is the after-tax cost of debt used rather than the pre-tax cost?

Because debt holders pay no taxes Because interest expense is tax-deductible, reducing the effective cost of debt to the company Because the IRS requires after-tax reporting for all debt instruments Because pre-tax cost of debt is unavailable from market data

Correct Answer:

Because interest expense is tax-deductible, reducing the effective cost of debt to the company

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