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Series 79: Collection, Analysis & Evaluation of Data
Series 79 practice questioneasyAdvanced Financial Analysis

Which component of WACC is adjusted for the company's marginal tax rate?

  1. ACost of preferred stock
  2. BCost of debt✓ Correct answer
  3. CCost of equity
  4. DMarket risk premium
Explanation

Why BCost of debt

The after-tax cost of debt is used in WACC, so debt payments benefit from tax deductibility. Forgetting tax adjustment understates the value of debt in capital structure analysis.

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