Why Is It Important to Include the Tax Effect into Cost

question 109

Multiple Choice

Why is it important to include the tax effect into cost of capital computations for firms with debt financing?

• A)firms pay taxes on the outstanding principal amount of the debt.
• B)taxable income is reduced by the amount of the interest expense.
• C)comparisons with equity financing would otherwise not be possible.
• D)taxes are paid on interest but not on dividends.

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Definitions:

Cost of merchandise sold

The total expense incurred by a company to buy or manufacture the goods sold during a given period.

Specific identification inventory costing method

An inventory valuation method where costs are attributed to individual items of inventory, enabling precise matching of costs with revenues when the specific items are sold.

Companies

Legal entities formed by individuals, stockholders, or shareholders, with the purpose of engaging in commercial or industrial activities.

Jewelers

Jewelers are professionals or businesses involved in the design, production, and sale of jewelry.