A tax adjustment must be made in determining the cost of ________.
A) long-term debt
B) common stock
C) preferred stock
D) retained earnings

Question

Quizplus · Accepted Answer

Taxes have an impact on the cost of long-term debt since interest paid on debt is tax-deductible, resulting in a tax shield. Therefore, the cost of debt needs to be adjusted for the tax benefits. The cost of common stock and preferred stock is not affected by taxes since dividends on these securities are not tax-deductible. Retained earnings are a source of financing and not a cost, thus not subject to tax adjustments.

A Tax Adjustment Must Be Made in Determining the Cost