The difference between the weighted-average cost of capital (WACC) and the pre-t

Question

The difference between the weighted-average cost of capital (WACC) and the pre-tax (unlevered) WACC is

A: the weighted-average cost of capital multiplies the cost of debt by (1-tax rate) and the pre-tax WACC does not.

B: the weighted-average cost of capital is based on the after-tax cost of equity and the pre-tax WACC is based on the after-tax cost of debt.

C: the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure, and the pre-tax WACC does not.

D: the weighted-average cost of capital multiplies the cost of equity and the cost of debt by (1-tax rate) and the pre-tax WACC does not.

Explanation / Answer

correct option is C" - the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure, and the pre-tax WACC does not.

WACC = [Debt(1-tax) *Wd] +[Equity *We]

Pre tax WACC =cost of equity =

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