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Dear sir,
Why we deduct tax from Total MV of Debt in Asset Beta Formula (Vd (1-t)) ?
Thanks,
You are effectively asking me to derive the formula, which is not in the syllabus – the formula is given to you in the exam.
It comes from M&M in that the interest on debt is allowable for tax, and when that is followed through it means we have to reduce the MV of the debt accordingly when looking at the affect of gearing on the equity beta.
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