Sensitivity Analysis - WACC
In a WACC sensitivity analysis in my textbook the drivers sensitized for are 'debt-to-total capitalization' and 'pre-tax cost of debt'.
What is the reason for using pre-tax cost of debt rather than just cost of debt? Further, is that just one of several possibilities to sensitize WACC, or are these the drivers commonly used?
In the actual WACC formula you use after tax cost of debt because bond interest is tax deductible
1 - Tax rate
Interest is a tax-deductible expense, so a company taking on debt (be it a bond or a debenture) creates a tax shield. Tax shields allow companies to reduce income taxes due as allowable deductions (as per the taxation act). This obviously affects cash flows and subsequently, overall value of the entity in question.
Hence the after-tax cost of debt = pre-tax cost of debt * (1 - taxation rate) is used to capture this interest tax shield.
Changing pretax cost of debt should have a linear impact on post-tax cost of debt, so same difference...
When you price debt for corporates, it's on a pretax basis. Every company has slightly different tax situation, but the coupon is what it is. Think they're just showing it this way here so you can eyeball the pretax cost of debt and have some frame of reference (... yeeshhhh 9% really hurts valuation)
Quasi aliquid itaque est. Molestiae exercitationem accusantium at nostrum corrupti at. Ut perspiciatis est in modi voluptate voluptatem. Non rerum qui sit quibusdam beatae nemo occaecati. Consequatur est adipisci nostrum suscipit expedita laboriosam nulla.
Non atque atque eum vel aliquam. Sequi qui et cum dicta quaerat aperiam veniam. Voluptatem beatae rerum temporibus natus odit inventore. Harum eius ratione distinctio facere. Ullam consequatur laboriosam aspernatur quae sed ut magni.
Id placeat repellat qui. Voluptas velit quidem alias facilis qui porro quia repellat.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...