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hello john
please see Dec 12 Q1a
in this question we calculated market value of debt by discounting the cash flows.
however we used cash flows as 5.2 which is 5.2% of 100
why didnt we take tax into account? the cash flows should be 5.2(1-t)
when do use tax
please explain
The market value of debt is always the PV of the future receipts (5.20 per year, and then the reception) discounted at the investors required rate of return.
Tax is of no relevance – company tax affects the company, not the investor.This is all explained in my free lectures on the valuation of securities for Paper FM (because this is revision from Paper FM).
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