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Dear John,
For redeemable debt, I know ideally we should not be using the WACC formula. Instead we should compute the cost of equity and cost of debt(to the company) and take its wtd average based on the total market value of equity and debt.
Referring to the Coeden sum in BPP Kit, they have calculated the cost of debt (to the company) as Rf+spread, then in WACC formula, why are they again multiplying it with (1-t)?
As per my understanding, you would generally use (1-t), multiply it with the required rate of return for debt holders, to arrive at cost of debt, and that too for irredeemable debts. But in this question we already have the cost of debt (to the company) then why do we multiply it with 1-T to get the WACC figure?Thank you.
AamirRf (+ spread when relevant) is not the cost of debt to the company. It is the return required by investors and is therefore pre-tax because investors are not affected by company tax.
The risk free rate is always the risk free return to investors and not the cost to the company.
It is the cost to the company that is calculated after tax.
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