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Hi John,
Hope you a keeping well.
Am I right in saying when calculating the NPV I use the after tax cost of capital and when calculating the valuation of debt I use the before tax cost of debt?
If the examiner gave the before tax cost of capital (for example in NPV question) would I use the formula; Interest x (1-tax rate) to find the the after tax cost?
Thanks
GrahamThe NPV is calculated using the after-tax WACC.
The market value of debt is calculated using the pre-tax cost of debt because it is investors who determine the market value using their required rate of return (and they are not affected by company tax).
The cost of equity is not affected by tax. The cost of debt is calculated as you state if it is irredeemable debt. If it is redeemable then it is calculated as the IRR of the after-tax flows.
All of the above is explained in detail in our free lecture notes together with the free lectures working through the chapters in the notes.
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