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A company receives a perpetuity of $20,000 per annum in arrears, and pays 30% corporation tax 12 months after the end of the year to which the cash flows relate.
At a cost of capital of 10%, what is the after-tax present value of the perpetuityHi sir, when we calculating present values, why don’t we use 10%*(1-30%)=7% as after-tax capital since the cash flows are supposed to be after-tax?
If 10% is the cost of capital then it is automatically after tax (unless the question had specifically said it was the pre-tax cost of capital, which it does not).
However when doing the discounting we have to discount the inflows of $20,000 per year and the tax outflows of $6,000 per year, separately because the inflows start at time 1 and the tax outflows start at time 2.
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