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Hi John,
Kindly help me out with these.
1) If pre tax cost of debt is 10% and tax is 30% that means cost of debt is 7% right? [10(1-t)] .
2) If the money rate/actual cost of capital includes inflation so it makes sense to use this for discounting but then why do we sometimes use real/effective rate for discounting?
Regards,
Furqan1. Correct 🙂
2. Usually we discount the nominal cash flows (the actual flows after inflating) at the nominal (actual) cost of capital. This isn’t possible when it is a perpetuity, so then we discount the current price cash flows (without inflation) at the real cost of capital (without inflation).
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