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hi,
wondering why in Dec12 Q1 calculated cost of debt before proposal is including tax? Shouldn’t it be excluding tax?
Yes, and no 🙂
Certainly, when it says in the second line of the answer that cost of debt is 4.9%, this is actually the return to the investor and not the cost to the company (because it before tax).
However, the examiner has used the figure correctly.
It is the return to the investor that determines that market value of the debt (and so he was correct to use 4.9% there).
When he calculates the WACC, he does multiply the 4.9% by (1-t) to end up with the cost to the company.aha, I new there must be some trick. So if I understand right we use 4.9% when calculating cost of debt which we then adjust for our tax purposes in WACC.
And if there would not be asked for WACC, then our cost of debt would be 4.9%(1-t). Right?
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