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In the 2016 Sept FM paper, there is a MCQ question on calculating the market value of the convertible loan note and the before-tax cost of debt is being used.
I would like to clarify when do we use the before-tax cost of debt and after-tax cost of debt.
Thank you.It is investors who determine the market value as the the PV of the future receipts discounted at their required return. Investors are not affected by company tax and therefore their required rate of return is the before-tax cost of debt.
The after-tax cost of debt is only relevant when calculating the cost of capital to the company.
This is commonly asked in the exam and I do stress this in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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