Explanation:

The correct answer is A (Debt) because interest payments on debt are tax-deductible. This tax deductibility reduces the effective marginal cost of debt, calculated as r(1 - t), where r is the cost of debt and t is the tax rate. This benefit is known as the tax shield.

• B (Equity) is incorrect because the cost of equity does not benefit from a tax shield. The cost of equity is simply the weight of equity times the cost of equity, with no adjustments for taxation.

• C (Preferred equity) is incorrect because dividends on preferred stock are not tax-deductible. Therefore, issuing preferred equity does not provide a tax shield to the company.