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Hello, while solving investment appraisal questions, i often end up having terms that, for e.g After tax money cost of capital is xx% and also sometimes, before tax COC of xx%
I just want to ask, do we have to convert it into After Tax COC if its before tax?
Because in questions with After tax COC my answers are perfect, but before tax is sort of confusing, and also i came across a question, in which there was.. before-tax Real rate of return was 7% and General inflation was 4.7%..
However i just multiplier like 1.07 * 1.047 and came to 15%, however my friend told me to deduct tax from 15% and make it after tax.Now my question here was that why not convert before tax real rate of return 7% to after tax and then multiply it with 4.7 inflation…
Sorry if there is any confusion in my question
In real exam questions, almost always you are either given the actual (nominal) cost of capital after tax, or you are required to calculate it in full (the weighted average cost of capital).
There have been a few cases (very few) where you were given the real cost of capital, the rate of inflation, and you needed to calculate the nominal (actual) cost of capital.
If you are given the cost of capital then it is automatically after tax. So….if you are told that the real cost of capital is 7% and the rate of inflation is 4.7% then the nominal (actual) cost of capital is (1.07 x 1.047) – 1 = 0.12029. i.e. 12.029% (I don’t know where you got 15% from 🙂 )
This 12.028% is also automatically after tax.I cannot remember a single case in the exam of being told the before tax cost of capital. If you were, then you would subtract the tax to get the after tax cost, and then continue as above.
Sorry, i was just assuming 15%, it was a question from kit and it clearly stated that Before Tax real cost of capital was 7%.. so we should convert it into after tax then?
Lets assume if examiner states Before tax Nominal cost of capital, then do we have to convert it into after tax?
Just to be sure about after and before tax..
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