We directly deduct tax from EBIT or we add post tax interest in Net income to arrive at free cash flow for firm. When we do so we are arriving at a after tax cash flow which will be discounted by post tax WACC to arrive at the value of firm.
Is the following correct.
- We have considered tax benefit by using post tax cost of debt in WACC.( Because if we discount the pre-tax interest with pre tax rate we would get the same value as we would get if we discount the post tax interest with post tax cost of debt). Or have we not considered tax benefit?
On doing so i.e. discounting post tax cash flow of a debt with post tax rate and pre tax cash flow with pre tax rate, I have noticed that as the rate increases(keeping the coupon amount constant) the difference also increases by certain amount. If this is the case then the previous statement does not hold true?( i.e. should we not get the same value?)
Or is the difference so little that it is negligible?