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doubt regarding computation of cost and debt

Financial Management

sir,in this sum, while computing the cost of equity using the second method you have taken the cost of capital to be 15%(pre tax) and while computing the overall cost of capital you have taken the post tax cost of capital.why is that so??? Video Details Financial Management Financial Decisions - Capital Structure 10. Illustration 8 (MM Approach - with tax)

aravind lalji

CA Inter

★ 0

01-May-24 04:19

Answers (2)

Best Answer

The computation of Ke in the 2nd method is based on formula, where Kd is pre-tax. Please go through the derivation of the formula in the video lecture to understand that better. Regarding the Overall cost, as per the fundamentals, it shall be computed based on post tax specific costs only.

aditya yanamandra

Faculty

03-May-24 17:22

For overall cost of capital you take market value of equity and market value of debt. So you have to take after tax earnings available to shareholders and debt to calculate overall cost of capital and as for cost of equity you have to take pre tax