Question

What is a reasonable measure for the before tax cost of debt (rd). Why?

Answer 1

Cost of debt is always after tax because the interest expense on borrowing are tax deductible therefore to show the net effect Kd is shown as post tax.

Kd = Borrow Rate (1- tax)

Before tax cost of debt can be find from below mentioned source -

• Details of debt securities company have, interest expense can be directly found.
• Cash flow statement also provides the details of gross interest expense in financing activity.
• If only post tax cost of debt is provided then using the reverse calculation we can arrive at pre tax cost of debt.

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