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When to use pre tax cost of debt and when to use post tax cost of debt. For calculation of loan note value pre tax cost of debt has been used. Can some one please explain why.
I explain why over and over again in my free lectures!!!!
It is investors who determine the market value of debt and they are not affected by company tax. We discount their expected receipts at their required return, which is the pre-tax cost of debt.
The post tax cost of debt is the cost to the company, and the company does get the benefit of the tax relief on the interest.
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