Question

Among the options that describe the folliowing rates:

• _Re: levered cost of capital
• R_d: cost of debt
• R_u: unlevered cost of capital
• Before-tax WACC
• After-tax WACC

which option is the least accurate?

Select one:

a. R_d is likely to be the lowest.

b. After-tax WACC is likely to be higher than R_u

c. Before-tax WACC is lower than Re.

d. R_e is likely to be the highest.

e. After-tax WACC is lower than before-tax WACC.

Answer 1

After tax weighted average cost of capital will be calculated after considering the effect of tax deduction which will be given to cost of debt because interest payable will be tax deductible and hence the after-tax cost of capital will be lower then unlevered cost of capital.

Unlevered cost of capital will not be considering the effect of debt capital and hence it can be said that it will be higher than weighted average cost of capital after tax.

Correct answer will be option (B) After tax weighted average cost of capital is likely to be higher than Ru