For which capital component must you make a tax adjustment when calculating a firm's weighted average cost of capital

When calculating a firm's weighted average cost of capital, WACC, all capital sources are included. This means you look at the stocks, common and/or preferred, bonds, as well as other long-term debts.

When making tax adjustments for the WACC, this needs to be made on Debt because interest paid on this capital component reduces Net Income.

The correct answer is  "b)  net income overstated, assets unaffected, liabilities understated, and owner's equity overstated."