Which option correctly describes a typical component of calculating WACC?

• A. Only pretax debt costs.
• B. Revenue minus expenses.
• C. Net present value.
• D. After-tax cost of debt, cost of equity, and their weights.

Answer: (D)

WACC is the blended cost of financing a firm’s operations, combining debt and equity in the proportions of the firm’s funding. The debt portion uses the after-tax cost because interest is tax-deductible, so you multiply the debt cost by (1 − tax rate). The equity portion is the cost of equity, reflecting the return demanded by shareholders. The weights reflect how much each source funds the firm in the chosen capital structure. Put together, WACC = (proportion of equity) × (cost of equity) + (proportion of debt) × (after-tax cost of debt). For example, with a 30% tax rate, debt cost 6%, equity cost 10%, and equal financing weights, WACC = 0.5×10% + 0.5×6%×(1−0.3) = 7.1%. Other choices miss either the tax shield on debt, or confuse WACC with revenue, or misidentify NPV as a component rather than a discount rate used in valuation.