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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 perpetuity?
A $140,000
B $145,454
C $144,000
D $127,27420K x 1/0.1
PV = $200kWhy do we use 1/0.1? And for the AF part we have used the 1/0.1 again to minus the DF of .909
I dont understand why do we use the 1/0.1 John. Please help!The discount factor for a perpetuity is always 1/r where r is the relevant rate of interest.
This only works when the first flow is in 1 years time. In the case of the tax, the first flow is in 2 years time and therefore the we need to subtract the discount factor for 1 year from the discount factor for the perpetuity.
You must watch the free lectures on the chapter 7 of our free lecture notes, because I explain how to deal with perpetuities (and why), with examples.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
(And if you are still not clear watch the relevant Paper F2 lectures, because basic discounting like this is revision of Paper F2).
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