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1. Usually when we calculate cost of debt, we calculate pre tax cost of debt, then we calculate post cost of debt only when we calculate WACC ??
2. Actually when we calculate cost of debt, not for wacc, why do we only show the portion of pre tax cost of debt ??? Is it ok to show post tax?
3. For equity valuation of the company and when we discount the cashflow, y do we use wacc? Shouldn’t we suppose to discount using cost of equity? Since we are calculating equity portion? for debt valuation, we discount future receipts using lenders required rate of return…
Therefore for equity valuation, shouldn’t we suppose to use cost of equity to discount the cashflow??
1 The cost of debt to the company is always calculated after tax – the company gets tax relief on the interest. I explain this, with examples, in my free lectures.
2. I do not understand you. The pre-tax cost of debt is the investors required rate of return. Again, if we want the cost of debt to the company then it is always calculated after tax.
3. To value the equity we either take the free cash flows to equity and discount at the cost of equity, or alternatively we take the free cash flows (i.e. before interest) and discount at the WACC to get the value of the business, then subtract the debt to get the value of the equity. Yet again, I explain all this in my lectures.
Please watch the lectures – you cannot expect me to type them all out here 🙂
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