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sir i wanted to understand why in the formula of irredeemable debt ( kd(1-t)=I(1-t)/MV )do we have MV of the debt in the denominator? Should not we have the Par value of the debt as the base? because as far as a company is concerned, for them the coupon payment is a percentage of Face value, regardless of the Market value!
many thanks in advance!
We always use the MV of debt when calculating the cost of debt (whether it is redeemable or irredeemable). The reason is that we need to know what return investors are currently requiring because this will be the cost of any future debt raised, and that is what we are concerned with.
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