Correct Answer:
B. Tax deductibility of interest
The cost of capital represents the rate of return a company must earn on an investment to maintain its market value. It comprises the cost of debt and the cost of equity. Generally, the cost of debt is lower than the cost of equity due to fundamental differences in their characteristics and treatment.
The correct answer is Tax deductibility of interest. A primary reason for the lower cost of debt is that interest payments on debt are tax-deductible for the company. This