Cost of Debt / After tax cost of debt (inputs for WACC)

CFA Level II
#1

If you were given the following and asked to calculate WACC:

Cost of Equity = 15%

Cost of Debt = 7%

and earlier in the item set within the income statement you also found that the given the tax rate was say = 33.333%

…

What would you consider to be your after tax cost of debt to use in the WACC formula? How exactly do we know when to either

a) use .07*(1-.333) as your after tax cost of debt for the WACC formula

or alternatively

b)simply use 7% and assume that “after tax” cost of debt is implied to be 7%?

What keywords would trigger you to decide between the two?

*for responses to this question I’m not looking for someone simply stating “just use -A- because you need to calculate for tax shield”. I understand conceptually that we obviously need to reduce the pretax cost of debt account for the tax shield. My question is moreso, how do we determine whether a given “cost of debt” is already inclusive of a reduction to account for tax shield if it is not specified?

Thanks for your advice, and best of luck to everyone on Saturday!!!

-Sam

#2

I don’t know for this case but effective tax rate used in WACC calculation in each case may be derived from P/L:

Income tax expense amount / Earnings before tax

#3

If they refer to it as “cost of debt”, it’s before taxes.

If they intend it to be the after-tax cost of debt, they’ll say so explicitly.