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Hi John,
I viewed the lecture on valuation and you said to use the pre-tax Kd when calculating the MV of bonds… But that is from an investor perspective.
How do i know if the question is asking for post or pre tax Kd to be use?Really confuse about this.
(I did some questions that gave me both Kd)
Thanks!
If you are asked to calculate the market value of a bond then you always use the pre-tax interest because the investor receive the full interest, and it is the investors who fix the market value.
If you are asked to calculate the cost of debt to the company then you always use the after tax interest because the company gets the benefit of tax relief on the interest. (This is dealt with in the lectures on the cost of capital)
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