# Cost of Debt (Practice Question 2 d)

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zyywzh
Member

In PQ2d, Kd is calculated from NPV with consideration of 35% tax.
Then, in WACC calculation, there is no deduction of tax benefit for debt capital.

Is this the practical way in this type of questions? Thank you!

#80897

John Moffat
Keymaster

The cost of debt has been calculated using the after tax interest, and so the tax benefit has already been taken into account.
Therefore it is not taken into account a second time when calculating the WACC.

The answer is the correct way to do it in the exam (although I should not have labelled the cost of debt as Kd because strictly Kd is the return to investors, which is pre-tax).

I guess you are thinking about the formula for WACC on the formula sheet. That formula only works for irredeemable debt – in this case the after tax cost of debt is the pre-tax cost x (1-t). The formula does not work when the debt is redeemable and you must do it the way the answer to that question does.

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