The correct answer is: D. Both A and B
The cost of capital is the rate of return that a company must earn on its investments in order to satisfy its investors. It is used to calculate the discount rate for cash flows in a discounted cash flow analysis.
The cost of capital is composed of the cost of equity and the cost of debt. The cost of equity is the rate of return that shareholders expect to earn on their investment in the company. The cost of debt is the rate of interest that the company pays on its borrowings.
The tax rate is relevant and important for the calculation of the cost of equity because it affects the after-tax return to shareholders. The after-tax return to shareholders is equal to the pre-tax return multiplied by (1 – tax rate).
The tax rate is also relevant and important for the calculation of the cost of debt because it affects the after-tax cost of debt. The after-tax cost of debt is equal to the pre-tax cost of debt multiplied by (1 – tax rate).
Therefore, the tax rate is relevant and important for the calculation of the cost of capital of both equity and debt.