The Cost of Debt, Rd, Is Normally Less Than Rs

question 70

True/False

The cost of debt, rd, is normally less than rs, so rd(1 σ T) will normally be much less than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost of capital (WACC) will normally be greater than rd(1-T).

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Definitions:

Equity

The ownership interest held by shareholders in a corporation, represented by their shares of stock.

Proportional

A relationship between two quantities where they increase or decrease at the same rate.

Tax Collection

The process performed by governments or authorized agencies to collect taxes from individuals, corporations, and other entities to fund public expenditures.

Administrative Costs

The resources used (which is a cost) by government to collect the tax, and by taxpayers to pay it as well as to evade it, over and above the amount of the tax.