WACC After Tax Cost of Debt
Can someone explain why Cost of Debt is after tax in the formula for WACC? I understand that interest is tax deductible. But the way I understand cost of debt and cost of equity is that they are required returns/opportunity costs for investors. So from a debt investors perspective, why should they care that debt is tax deductible? They still would require the rate of return on debt before tax, not after tax. By saying that interest is tax deductible, you are essentially saying that debt investors would be willing to pay more today for the same future cash flows due to the fact that interest is tax deductible for the firm. I'm probably thinking about this the wrong way so any help would be much appreciated.
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