Problem:
Why is it important to include the tax effect into cost of capital computations for firms with debt financing?
a. Comparisons with equity financing would otherwise not be possible.
b. Firms pay taxes on the outstanding principal amount of the debt.
c. Taxable income is reduced by the amount of the interest expense.
d. Taxes are paid on interest but not on dividends.
Note: Please describe comprehensively and provide step by step solution.