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:

Subsidiaries

Companies that are partially or fully owned by another company, which usually holds a controlling interest in the subsidiary's shares.

Accrual-based Net Income

Net income calculated under the accrual basis of accounting, recognizing revenues when earned and expenses when incurred, regardless of cash flow.

Domestic Corporations

Companies that are incorporated and operate within the legal jurisdiction of a specific country.

Accrual-based Net Income

The measure of an organization's earning power from ongoing operations, calculated by adding non-cash expenses and revenues booked but not paid to net income under cash accounting.