General Studies · Tax Shield and Cost of Capital
Given below are two statements: one is labelled as Assertion A and the other is labelled as Reason R. Assertion A: The inclusion of debt in a firm's capital structure reduces the overall Weighted Average Cost of Capital (WACC) when corporate taxes are considered. Reason R: The corporate tax deductibility of interest payments creates a tax shield, which effectively forces the government to subsidize the firm's cost of borrowing. In the light of the above statements, choose the most appropriate answer from the options given below:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Both Assertion A and Reason R are correct, but Reason R is NOT the correct explanation of Assertion A
- 2Assertion A is correct, but Reason R is not correct
- 3Both Assertion A and Reason R are correct, and Reason R is the correct explanation of Assertion A✓
- 4Assertion A is not correct, but Reason R is correct
Correct answer
Both Assertion A and Reason R are correct, and Reason R is the correct explanation of Assertion A
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