Question

What does Prof. Damodaran mean when he wrote that tax savings from debt are shown up in the Cost of Capital approach through the discount rate but that the discount rate for tax benefits from interest expenses is the unlevered cost of equity?

Answer 1

What I understands It means when your doing Firm valuation while discounting the cash flows to the firm in our WACC computation the benefit we get of tax saving from debt is considered (1-t) in discount rate..if u unlever the leverage effect you would arrive to cost of equity.