Module II· WACC & Capital StructureIntermediate
Question
What is the difference between pretax and post-tax WACC, and which one belongs in the DCF?
Answer
Mechanics
Two variants:
- Post-tax WACC (standard): cost of debt multiplied by the (1−t) factor. Standard in IB, combined with after-tax UFCF.
- Pretax WACC: cost of debt before the tax shield, without the (1−t) factor. Used when UFCF is modeled on a pretax basis — extremely rare.
Consistency rule
If UFCF accounts for cash taxes, then use WACC with (1−t) on debt — otherwise the tax shield is double-counted or missed entirely.
NOL pitfall
If the company is in an NOL position and cash taxes are 0%, the (1−t) adjustment in WACC is premature. For the NOL period you should actually use the pretax cost of debt.