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When calculating cost of debt, why haven’t we got tax relief?
The Debt calculation in WACC is just 7% x 40/140But in example 4, Cost of Debt has been calculated as 8% x 0.7 = 5.6% and this is used for the WACC calculation.
Please explain why there’s a different approach to both questions
This is my mistake and I will have it corrected – thanks for noticing.
The cost of debt is automatically quoted after tax relief (unless it is given as the pre-tax cost of debt) and so should have been used as 8% in example 4, and not have tax relief accounted for again.
Thank you for the reply Sir. So just to confirm things, the Cost of Debt in example 3 should be 7% and the Cost of Debt for example 4 needs to remain 8%, am I right? Thank you for the reply again Sir 🙂
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