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Hi,
I have a question, if in a question I have been asked to find the NPV of cash flows related to an investment and I am given cost of capital pre and after-tax, which of the two should I use? After-tax, right?
thank you
Regards,
S.
Hi,
When calculate the current market value of bond, the cost of capital used should be pre-tax or post-tax rate? (as question given both pre and post-tax cost of capital, and also tax rate). How to determine which rate should be used?
Another, when calculate the PV of bond interest (by using annuity method), how to determine whether the tax saving should be deduct from the interest? For example, Sept’16 Q11.
Thank you.
Hi,
to calculate the current market value I think you need to use the pre-tax rate.
When you calculate the 2 NPVs to be used in the IRR formula ( to calculate cost of debt) then interest rate should be post-tax, so for example if you have 8% loan notes and corporation tax of 30%, use 8% x 70%= 5.6%.
I hope this helps
S.
Salvatore is correct.
We always use the pre-tax rate to calculate the market value (because it is investors who determine the market value and they do not get the benefit of company tax relief, so their required return is equal to the pre-tax cost of debt.
All of this is explained in detail (with examples) in my free lectures!
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