The presence of corporate taxes in subsidizing the cost ofdebt has the effect of

Question

The presence of corporate taxes in subsidizing the cost ofdebt has the effect of: a.) increasing the cost of equity b.) increasing the cost of debt and decreasing the value ofthe firm c.) decreasing the cost of debt and decreasing the cost ofcapital (up to some point) The presence of corporate taxes in subsidizing the cost ofdebt has the effect of: a.) increasing the cost of equity b.) increasing the cost of debt and decreasing the value ofthe firm c.) decreasing the cost of debt and decreasing the cost ofcapital (up to some point)

Explanation / Answer

the answer is c it decreases cost of debt and decrease cost ofcapital wacc= re (e/v) + rd (1-tc) (d/v) as taxes increase the the rd aka the cost of debt decreasesand if debt decrease than wacc cost of capital has todecrease. this is also from morten and mogiling ( i know i spelt itwrong im tired) so ill call it MM in a world with no cost of financial distress then as long astaxs increase cost of capital decrease.

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