A sudden and unexpected decrease in the tax rate would be expected to have the most significant impact on the carrying cost of which of the following components of a firm's capital structure?
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A. B. C. D. E.E
After a sudden and unexpected decrease in the tax rate, corporations will find themselves in an environment where the tax-shelter benefits of debt financing have become compromised. Currently, firms can deduct coupon payments on their debt securities from their annual income, and this taxdeductibility feature is an important consideration in any capital budgeting decision. A decrease in the tax rate will increase the cost of debt, and therefore will decrease the attractiveness of debt securities as an alternative to other methods of financing.