Write the standard after-tax weighted average cost of capital (WACC) formula.

• A. WACC = (E/(E+D)) * Re + (D/(E+D)) * Rd
• B. WACC = (E/(E+D)) * Re + (D/(E+D)) * Rd * (1 - Tc)
• C. WACC = (E/(E+D)) * Rd + (D/(E+D)) * Re * (1 - Tc)
• D. WACC = Re + Rd - Tc

Answer: (B)

The idea is to combine the costs of the two sources of financing—equity and debt—each weighted by how much of the firm’s capital they represent, and to reflect that debt carries a tax shield because interest is tax-deductible. The standard after-tax WACC is:

WACC = (E/(E+D)) * Re + (D/(E+D)) * Rd * (1 - Tc)

Here, E is the market value of equity, D is the market value of debt, Re is the cost of equity, Rd is the before-tax cost of debt, and Tc is the corporate tax rate. The term (1 - Tc) lowers the debt component because interest expense reduces taxable income, effectively making debt cheaper after taxes. The equity portion is not reduced by taxes in this formula, since dividends or capital gains aren’t tax-deductible like interest. This combination yields the appropriate hurdle rate for evaluating after-tax cash flows.

If taxes were ignored, you’d omit the (1 - Tc) factor and get a pre-tax version; the other options either mix up the components or omit the tax shield.