How do taxes affect the weighted average cost of capital?

Taxes decrease both the cost of debt and the cost of equity because both interest payments and dividends are tax-deductible.

Taxes increase both the cost of debt and the cost of equity because both interest payments and dividends are tax-deductible.

Taxes decrease the cost of debt only because interest payments are tax-deductible and dividends are not.

Taxes decrease the cost of equity only because dividends are tax-deductible and interest payments are not.

Taxes have no effect because neither interest payments nor dividends are tax-deductible.