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Cost of Debt
Hello,
I was referred to join here by Mr. Joe Styles from Investopedia.com. There is this one question that has been bugging me for about a month now.
WACC is calculated as:
[(E/V) * Re] + [(D/V) * Rd * (1-Rt)]
Where;
E = Total Equity
D = Total Debt
V = E + D
Re = Cost of Equity
Rd = Cost of debt
Rt = Tax rate
Now, my question is - why is there such a concept as a pre-tax cost of debt and post-tax cost of debt? Why is the cost of debt being multiplied by (1-Rt)? I have begun my foray into the world of management accounting by first studying cash flows, so I can't see the implications of these concepts. I mean...why not be the 'cost of debt' be just it and not multiply it anymore by the said factor? Please help me.
Many thanks,
lex
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