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dear tutor
with reference to question 5 (a) on December 2014 paper, why is it that tax is deducted from the cost of debt when calculating the IRR ?? for the market value??
Tax has not been deducted when calculating the market value – the market value is given in the question!!!
Tax is deducted from the interest payments when calculating the cost of debt (the IRR calculation). We always do because we are calculating the cost of debt to the company and the company gets tax relief on the interest payments, which makes the cost lower.
You really do need to watch my free lectures on the calculation of the cost of capital – there is always a lot of cost of capital calculations in the exam.
so if we calculate the cost of debt to investors it’s only then we ignore tax??? and how will I know that now we are calculating the cost of debt for the company not the investors??
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