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when market value of the convertible bond was calculated pre-tax interest was taken. why is this so?? shouldn’t we deduct tax as interest is tax deductible? so shouldn’t it be (9 x 0.7)= 6.3?
Thank You
You clearly have not been watching my free lectures!!
It is investors who determine the market value, and investors are not affected by company tax. We always discount by the pre-tax interest to calculate market value.
(The tax is only relevant when calculating a cost of debt to the company because it is the company who gets tax relief on the interest)
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