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What are the effects of a corporate tax on the Weighted Average Cost of Capital of a business?

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2006-03-09 06:06:25
2006-03-09 06:06:25

Only when interest paid on debt is allowed to be tax deductible that a corporate tax will help pull the WACC down. This is because we used an after-tax rate for cost of debt in calculating WACC. And by using the after-tax rate we are assumming that the government allows companies to use interest paid on debt reduce their income tax obligations, hence creating a tax-shield benefit for adding debt. From Peerawich

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