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Hello Teacher,
I’m kind off confused with something. When the market value of redeemable debt is calculated, I noticed the annual interest cash flows are not adjusted for tax relief; but when the cost of redeemable debt is calculated annual interest cash flows are adjusted for tax relief.
Can you pls clarify
The market value is determined by the investors – it is the present value of their future receipts discounted at their required return.
They receive the full interest (it is the company that gets that tax relief on the interest, not the investors) and so when calculating the market value we use the full interest.
When calculating the cost to the company, then we do use the after-tax interest payments because the company does get a tax saving not the interest payments.
I do suggest that you watch my free lectures (including the relevant Paper F9 lectures, because this is revision of Paper F9).
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