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In the formula for calculating Asset Beta:
Why do we remove the tax element from the Market Value of the debt? Isn’t the interest portion only that is subject to tax relief?
You are effectively asking me to prove the formula, which I am certainly not going to do because proving it is not in the syllabus! 🙂
It is because the formula comes from M&M, and (with M&M’s assumptions) the present value of the tax savings on the interest will be equal to the market value multiplied by the tax rate.
thanks John 🙂 I understand. Just like the mv of the equity is the pv of future dividends, so is the mv of the debt.
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