Weighted-average cost of capital

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  • February 13, 2014 at 3:27 am #183647
    Rose
    Participant

    When do I need to use the tax rate when computing the weighted-average cost of capital? At first I thought to use it only for bonds and debt, but now I’m not so sure.

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  • February 13, 2014 at 4:22 am #511729
    acamp
    Participant

    That sounds about right, you want to consider the tax rate any time the cost of capital (ie: interest) is tax deductible. So equity financing, nothing deductible (OK maybe offering costs, but probably beyond the scope), debt financing, interest deductible. Therefore the debt financing does not cost (hence weighted average COST of capital) you the stated rate, but the net rate after taxes. (all assuming you can take the deduction, but I dont think they'd be that mean?!)

    Its been a few years, but I thats the gist of it.

    Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

    Becker Videos: [AUD - 82]

    California CPA

    February 13, 2014 at 4:22 am #511757
    acamp
    Participant

    That sounds about right, you want to consider the tax rate any time the cost of capital (ie: interest) is tax deductible. So equity financing, nothing deductible (OK maybe offering costs, but probably beyond the scope), debt financing, interest deductible. Therefore the debt financing does not cost (hence weighted average COST of capital) you the stated rate, but the net rate after taxes. (all assuming you can take the deduction, but I dont think they'd be that mean?!)

    Its been a few years, but I thats the gist of it.

    Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

    Becker Videos: [AUD - 82]

    California CPA

    February 13, 2014 at 2:47 pm #511731
    Anonymous
    Inactive

    @beauti92cpa thank you so very much for posing this question! This was something on my mind as I visited the forum this morning! and @acamp thank you for providing such a well reasoned response! because of you two, I will NOT FORGET this on Exam day!

    HiYa! Let's go Ninjas!

    February 13, 2014 at 2:47 pm #511759
    Anonymous
    Inactive

    @beauti92cpa thank you so very much for posing this question! This was something on my mind as I visited the forum this morning! and @acamp thank you for providing such a well reasoned response! because of you two, I will NOT FORGET this on Exam day!

    HiYa! Let's go Ninjas!

    February 13, 2014 at 5:28 pm #511733
    Rose
    Participant

    Thank you acamp!!

    February 13, 2014 at 5:28 pm #511761
    Rose
    Participant

    Thank you acamp!!

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