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John Moffat.
John Moffat.-
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kkhatani
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Hi,
How do we know whether the cost of debt is pretax or after tax? in the question it just says cost of debt is 7% so following the WACC formula i was multiplying this by the tax rate but this is not in the answers at the back of the notes. Please advise. Thanks
John Moffat
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The cost of debt is always (by definition) after tax unless you are specifically told otherwise.
You should not be using the WACC formula – partly because you don’t need a formula (and there can be more than two sources of finance), but more importantly the cost of debt is Kd(1-t) where Kd is the return to investors and when the debt is irredeemable. Usually in the exam the debt is redeemable and therefore the cost of debt will not be Kd(1-t) but will be the IRR of the after tax flows.
If you are still unsure about this, then do watch the relevant free F9 lectures, because this is revision of F9.
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