Why Is It Important to Include the Tax Effect into Cost

question 55

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.