Write at least 500 words that respond to the following questions with your thoughts, ideas, and comments. Be substantive and clear, and use examples to reinforce your ideas.
- In the weighted average cost of capital formula, the after-tax cost of debt is used instead of the before-tax cost of debt. However, no such adjustment is made to the cost of equity. Are you surprised by this different tax handling of debt versus equity? Why or why not?
- If a corporation borrowed all of the money for its project at the risk-free rate, does that mean that the project’s cost of capital is the risk-free rate?
- When calculating the weighted average cost of capital, would it matter more if book values instead of market values were used for equity instead of debt? Please explain.