To understand the advantage of debt capital from a tax perspective in the United States, determine the before-tax and approximated after-tax weighted average costs of capital if a project is funded 25%75% (D-E mix) with debt capital borrowed at 13% per year. A recent study indicates that corporate equity funds earn 21% per year and that the effective tax rate is 33% for the year.

The tax advantage reduces the WACC from X % to X % per year.