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Hi,
I was wondering is there any specific rule as to when to use the pre-tax cost of capital and when to use the after-tax cost of capital?
I have seen some questions use the pre-tax discount rate and some use the after-tax why and how to determine when to use which?
Kindly advise on the same.
Thank you.
Aayush Shah
When appraising a project we always use the after-tax cost of capital – there is no exception to this (unless obviously there is no tax, but that is unlikely!).
If determining the market value of equity or of debt then we use the investors required rate of return pre-tax, because investors are not affected by company tax and it is they who determine the market value.
I explain all of 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.
Thank you so much for this clarification it is very well understood now.
Kind regards,
Aayush Shah
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