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When calculating Beta asset from Beta Equity, in the denominator we put Vd(1-t).
Kindly let me know the reason behind this. I mean why not only Vd.
Especially if the non current liability is a bank loan.
Please help!
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Because interest payments are included in deductible expenses for income tax calculation.
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So, your real income tax (cash ouflow) will be 1-T for the loan.
vd is the value of debt
T is tax
Since debt is always tax deductable, and if tax percentage is,say 30%,then debt is definately going to be reduced by 30%,which is 100%-30% so in case of using vd(1-T), it will be vd(1-0.30),its just the same as multiplying debt by 70%.
U can ask as many questions on this one if u still dont get it
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