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#cfa-level-1 #corporate-finance #reading-36-cost-of-capital #taxes-and-cc
In the United States and many other tax jurisdictions, the interest on debt financing is a deduction to arrive at taxable income.
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2.1. Taxes and the Cost of Capital
Notice that in Equation 1 we adjust the expected before-tax cost on new debt financing, r d , by a factor of (1 − t). In the United States and many other tax jurisdictions, the interest on debt financing is a deduction to arrive at taxable income. Taking the tax-deductibility of interest as the base case, we adjust the pre-tax cost of debt for this tax shield. Multiplying r d by (1 − t) results in an estimate of the after-tax co


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