Consider the following equation: r_wacc = r_E + r_D(1 - τ_c) The term r_D(1 - τ_c)in this equation is A) the required rate of return on debt. B) the dollar amount of equity. C) the after-tax required rate of return on debt. D) the required rate of return on equity.

Question

Quizplus · Accepted Answer

The term rS1U1B1DS1U1B0(1 - τS1U1B1cS1U1B0) represents the after-tax cost of debt. It takes into account the tax shield provided by interest payments on debt (1 - τS1U1B1cS1U1B0) and the pre-tax required rate of return on debt (rS1U1B1D). Therefore, option C, which represents the after-tax required rate of return on debt, is the best choice.

Consider the Following Equation: Rwacc = RE

Consider the Following Equation: R_wacc = R_E