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First, just a general comment: before asking a question here, i have started to search previous posts on a question and have found answers ALREADY EXPLAIned by the tutors. am pretty sure that saves the valuable tutor’s time!
so…. after all the past questions on the above, i still have one question remaining and is on the cost of debt
1. kd is is taken to be rf+spread. why is it not (rf+spread)(1-T)
2. in calculating the yield “before” the proposal, we do not reduce the coupon by the tax rate. why?
3. same query for when we calculate the mkt value of debt “after” the proposal.
regards
1 Kd is the return to investors, which is before tax. The cost of debt is Kd (1-t)
2. The yield to investors is before tax.
3. Market values are determined by investors – they use their required return, which is before tax
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