When we calculate a firm's WACC, we need to know the firm's marginal tax rate because: Dividends paid create a tax deduction for the firm. All sources of capital create a tax deduction for the firm. Interest expense creates a tax deduction for the firm. Municipal bonds are usually tax-exempt, so the firm pays no taxes. Actually, a firm's tax rate does not affect a firm's WACC. Question 18 (2 points) Listen Which of the following statements is CORRECT? Firms rarely use debt financing because of the risk of default. As the firm's dividends go up, its net income goes down. A firm first pays a dividend, and then if income is left over it pays coupon payments on its debt. As a firm's WACC decreases, the likelihood for a positive NPV project rises. The cost of debt and equity are important factors in calculating WACC, but because preferred stock is a hybrid security, it does not affect the firm's WACC