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The Kd used in m&m proposition 2 formula about cost of equity ungeared is pre tax cost of debt ?? Is it correct ? And it’s always going to be pre tax cost of debt ??
And kd for wacc …when risk adjusted is it pre tax or post tax cost of debt
When we do kd( 1-t) it means cost of debt post tax ..so the kd we take in formula has to be pre tax right ?
1. Yes – Kd is the return to investors which is automatically the same as the pre-tax cost of debt.
2. Same answer as 1.
3. The formula for the WACC on the formula sheet only works if the debt is irredeemable. Usually in the exam, debt is redeemable.
I explain all the above in detail in my free lectures!!
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