Question

The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC.

A. True
B. False

Answer 1

The before-tax cost of debt is not used as the component cost of debt for developing a firm's WACC. Therefore, the given statement is false.

Step-by-step explanation:

The statement is False.

The after-tax cost of debt is used as the component cost of debt for the purpose of developing a firm's Weighted Average Cost of Capital (WACC), not the before-tax cost of debt which is lower. The after-tax cost of debt takes into account the tax benefits of interest expense deductions.

For example, let's say a company has a before-tax cost of debt of 6% and a tax rate of 30%. The after-tax cost of debt would be 4.2% (6% multiplied by (1 - 0.3)). The after-tax cost of debt reflects the actual cost to the company once tax benefits are considered, making it a more accurate measure for calculating WACC.