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In this question, why have we used post tax cost of debt (4.9%) to calculate MV of debt? When discounting cashflows from redeemable debt for calculating MV of debt, shouldn’t we use YTM (pre-tax kd) which would be 6.125?
No. The 4.9% is the pre-tax cost of debt (i.e. the return to the lenders or the YTM).
Using the beta always gives the return to the investors (as I do explain in my free lectures). When later in the answer the WACC is calculated then it has been multiplied by 0.8 so as to give the post-tax cost to the company.
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