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Hi,
Thank you for these free resources, the tuition is amazing!I have a question about example 7 on page 83.
I followed the answer until I got to the Issue costs less the tax relief:
‘Issue costs less tax relief = $0.12m – 0.12 x 0.25 x 0.943 = 0.092’Please can you explain this calculation please. I am unsure about the ‘-0.12’ in particular.
Thanks,
LouiseSo issue costs of $0.12m have to be paid at time 0.
These get tax relief of 25%. However, the tax relief isn’t enjoyed until the end of the year: time 1
The -0.12 x 0.25 x 0.943 represents the tax saving of 25% enjoyed at time1 where the discount rate is 6% [so 1/(1.06) = 0.943]
HTH
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