Why Should the Debt Portion of the WACC Be Adjusted

question 90

Multiple Choice

Why should the debt portion of the WACC be adjusted for tax?

• A)Because the interest paid on debt is not taxable at the firm level
• B)Because the interest paid on debt is not taxable at the investor level
• C)Because all components of the WACC are not taxable
• D)Because the principle paid on the debt is not taxable at the firm level

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Definitions:

Par Value Method

A method in accounting for the transaction of shares, where shares are recorded in accounts at their face or nominal value, often used in transactions related to bonds or share capital.

Treasury Stock

Shares of a company's own stock that it has reacquired from shareholders and holds, reducing the amount of outstanding stock on the open market.

Contributed Capital

The total value of all monetary and non-monetary assets that shareholders have provided to a company in exchange for shares of stock.

Cost Method

An accounting approach for investments, where the investment is recorded at its original purchase cost without subsequent change for market value fluctuations.