Answered: Discuss why the after-tax cost of…

Discuss why the after-tax cost of equity (common or preferred) does not have to be adjusted by the marginal income tax rate for the firm.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter14: Financing Liabilities: Bonds And Long-term Notes Payable

Section: Chapter Questions

Problem 2GI: Why does issuing debt result in an income tax advantage when compared to issuing equity?

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Discuss why the after-tax cost of equity (common or preferred) does not have to be adjusted by the marginal income tax rate for the firm.

Definition Definition Amount of return a company generally pays to its equity investors. The cost of equity represents the compensation required by the market in lieu of owning the asset firm and simultaneously bearing the risk of ownership.

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Why does issuing debt result in an income tax advantage when compared to issuing equity?
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