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When calculating Market Interest rate or Yield to Maturity do we have to take interest as after tax i.e. Interest * (1-tax) or we do not include any taxation effects?
In some past papers it has been taken has Interest * (1 – tax) but in the Examiner Article (and D14) no taxation effects were considered.
Past papers and the article (and our free lectures) are all consistent.
If you are after the return to investors (yield) then tax is not relevant because investors are not subject to company tax (and we always ignore income tax).
If we are calculating the cost to the company, then tax is relevant because the company will get tax relief on the interest and therefore it is the net interest (after tax) that is relevant.
The free lectures on the valuation of securities and on cost of capital will be helpful for you.
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