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hi, sir
could you please briefly explain/classify the cases when we use income tax in our calculation of cost of debt, market value of loan notes etc., and when we don’t? I just fail to see the logic here.
Income tax (personal tax) is never relevant in Paper F9.
Corporation tax (company tax) certainly is always relevant when calculating the cost of debt because the interest is tax allowable.
It is not relevant when you are asked to calculate the market value of debt, because it is investors who fix the market value and they are not affected by company tax.
Have you watched our free lectures? Because all of this is covered in the lectures dealing with the valuation of debt and dealing with the cost of debt.
yes, I’ve seen all your lectures, and some of them even 2-3 times. it’s just the information’s mixed in my head, and I’m trying to put it in order.
for example, if I’ve got it right, when we are to calculate the cost of debt of 8% irredeemable bonds quoted at 86% ex int, we should apply the corporation tax (25%) to the interest paid p.a. like this: 8×0.75/0.86=6.98%
why is it affected here?
That is correct.
It is because the 8% that the company is paying is tax allowable – so the company saves tax and therefore the net interest payment by the company is only 8 x 75%.
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