While computing the cost of equity using the formula, r =D1+g, we do not makePOany adjustment to express the cost of equity on an after-tax basis whereas whilecomputing the cost of debt, a tax adjustment is required to arrive at after-tax cost ofdebt. Why is this so? Explain briefly.

Equity is ownership of the company and debt is external to company.

Vhile computing the cost of equity using the formula, r = D1 +g, we do not make PO ny adjustment to express the cost of equity on an after-tax basis whereas while omputing the cost of debt, a tax adjustment is required to arrive at after-tax cost of lebt. Why is this so? Explain briefly.

Vhile computing the cost of equity using the formula, r = D1 +g, we do not make PO ny adjustment to express the cost of equity on an after-tax basis whereas while omputing the cost of debt, a tax adjustment is required to arrive at after-tax cost of lebt. Why is this so? Explain briefly.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter13: Valuation: Earnings-based Approach

Section: Chapter Questions

Problem 12QE

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