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Hi sir, when to use before tax Kd and after tax Kd? In 2011 Dec Q3, the answer shows that before tax Kd is used to calculate market value of bond. Aren’t we supposed to use after tax Kd instead?
You obviously have not been watching my free lectures, because I stress this (and it is often asked in the exam!!!).
It is investors who determine the MV, and the MV is the present value of the future expected receipts discounted at the investors required rate of return. Investors are not affected by company tax, and so there required rate of return is the same as the pre-tax cost of debt.
Tax is only relevant when calculating the cost of debt to the company, because the company gets tax relief on the interest.
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