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Hi John
I understand that when calculating the market value of debt it’s the investors who determine the market value and therefore not interested in Corp Tax but for arguments sake, what if the question asked the valuation from the company’s perspective, ie, calculate the value of debt of X Co and they provided the before tax cost of capital?
Would I be correct in stating that from the company’s perspective they get the tax shield on the interest payment and it would be the after tax cost I use in finding the value of the company?
Many thanks
GrahamYes. If we are valuing a business (because, for example, we are thinking of buying it and want to know how much we should offer) then we discount the future cash flows at the WACC and include the cost of debt (after tax) in the calculation of the WACC.
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