Question

When calculating a WACC, is the cost of ordinary equity adjusted for tax? Explain your answer.

Answer 1

When calculation of weighted average cost of capital ,the cost of ordinary equity capital is not adjusted for tax payments because equity capital cost are calculated based upon the expected return which will include the risk free rate of return and all those beta and market premium.

these are not adjusted for tax earlier, because there is not a fixed amount of mandatory payment associated with the equity capital, so there is not any known payments in advance.

So it can be said that only debt capital are adjusted for tax payments, equity capital are not adjusted for tax payment.