# CMA Study Group

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• #### 1.  Cost of New Capital - CMA part2

Posted 02-03-2023 04:54 AM
Hello CMA Community,

as per my notice in studying CMA part 2 Gliem source, I understand that if we want to calculate WACC Weighted Avg Cost of New Capital, We consider debt cost before tax. however while solving questions I found that the debt is always after tax %. What is the right way ? And how can I know if the question means cost of new capital or current capital?

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Hend Alutayri
Accountant
Yanbu
Saudi Arabia
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• #### 2.  RE: Cost of New Capital - CMA part2

Posted 02-04-2023 06:03 AM
while calculating cost of capital
always take after tax cost.
but preffered divident and comen divident are paid from net income
they dont have tax effect when calcuting cost of capital

after tax cost of debt = intrest*(1-tax rate)

• #### 3.  RE: Cost of New Capital - CMA part2

Posted 02-13-2023 09:30 AM

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Hend Alutayri
Accountant
Yanbu
Saudi Arabia
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• #### 4.  RE: Cost of New Capital - CMA part2

Posted 02-04-2023 08:12 AM
Hello Hend,

Both WACC and marginal cost of capital use after-tax cost of debt. I haven't seen anywhere so far where the cost of debt is calculated before tax, this is because of the tax deductibility of interests.

The question itself will tell you (sometimes in a clear way and sometimes not that explicitly) what you need to calculate. Sometimes the questions make reference to raising new capital for the capital project. In this case, I would calculate the marginal cost of capital. For some others, the question will not make any reference to future capital raising and will just provide: book values, market values stock price, dividend information, growth, Beta, etc.....If that's just the case I would go with WACC:

It depends on what information is provided and what the question is all about. Look for keywords such as raising new capital, and future capital investment needs...If they provide flotation costs, can be an indicator that you might have to calculate the cost of new capital.

I hope the above clarifies your concern.

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Brian Ruskolekier
Controller
Buenos Aires
Argentina
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• #### 5.  RE: Cost of New Capital - CMA part2

Posted 02-13-2023 09:30 AM

many thanks Brian, Made my life easier !

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Hend Alutayri
Accountant
Yanbu
Saudi Arabia
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