When calculating a companys weighted average cost of capital (used for discounting free cash flows when valuing the company), should we take the cost of net debt before or after tax?
After tax, i.e. by multiplying the interest rate on the debt by (1 less the marginal corporate income tax rate) if the company does in fact pay income tax, which means that it will have to make profits and not have very large tax-loss carryforwards. For more information, see chapter 23 of the Vernimmen.
