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question 5 on the chapter 17 revision test

RRanjit7y ago
Hi John on q.5 for the revision test for chp. 17, in working out the WACC, the corporation tax of 30% is not used in the calculations. so this saving on cost is not considered in WACC, is that correct?
John MoffatJohn MoffatTutor7y ago#1
The question says that the cost of debt of 7% is post tax. Given that it is already after tax, we don't take off tax again when calculated the WACC. (I guess you are referring to the WACC formula that appears on the formula sheet. However as I make very clear in my lectures, that formula is only correct if debt is irredeemable, and not if the debt is redeemable. However, whether or not redeemable, if we are given the post-tax cost of debt (as here) then the tax saving has already been accounted for)
RRanjit7y ago#2
That was very helpful. You are right, I misread the question details. Thanks again, John.
John MoffatJohn MoffatTutor7y ago#3
You are welcome :-)
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