Final answer:
The company with debt will generally have a lower WACC due to the tax shield effects. The presence of debt in the capital structure introduces the tax deductibility of interest, thus reducing the overall cost of capital compared to a company without debt.
Step-by-step explanation:
When considering which company will have a higher Weighted Average Cost of Capital (WACC), we must recognize the impact of financing with debt. A key component in the calculation of WACC is the cost of debt and the tax shield afforded by the interest expense on the debt. Considering that interest on debt is tax-deductible, this creates a tax shield which effectively lowers the cost of debt. This is why, all else being equal, a company with some level of debt in its capital structure typically has a lower WACC than a company with no debt, because the tax savings from the debt interest reduces the overall cost of capital.
In the situation where one company has debt and the other does not, assuming the cost of equity is the same for both, the company with debt will usually have a lower WACC due to the tax shield provided by the interest expense on debt. Thus, the correct answer is (b) The one with debt.
Interest rates for both corporate and government bonds play a role in determining the cost of debt portion of the WACC. However, the assumption regarding interest rates is not necessary to answer this question since we are examining the impact of the presence of debt on WACC, not the varying costs of debt due to changing interest rates.