Series 79 practice questionmediumAdvanced Financial Analysis
In calculating WACC, which tax rate should be used to adjust the cost of debt?
- AMarginal personal tax rate of equity holders
- BMarginal corporate tax rate✓ Correct answer
- CBlended state and federal rate of individuals
- DBlended sales tax rate
Explanation
Why B — Marginal corporate tax rate
The marginal corporate tax rate reflects the firm's actual tax shield from interest expense. Using an incorrect rate, such as a personal or sales tax, would significantly misstate the after-tax cost of debt and overall WACC.
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