Hi guys.
When calculating WACC it is a normal procedure to use the after tax cost of debt. The argument goes that the interest payments are tax deductible and therefore it is the real cost of debt, as we have tax shields.
However if the operating profit is negative or the company is utilising NOLs, the company might not pay taxes at all. Would not it be more sound to use Pre-Tax cost of debt (and subsequently changed WACC) in years where ther are no tax shields?
Thanks.
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