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Hi John,
8% Bonds have a book value of $120m
The 8% Bonds will be redeemed in 6 years’ time. The before tax cost of debt is 7%.
The co. pays the annual rate of tax @30% p.a.
when calculating the PV of the future interest, the examiner has not taken into account the tax rate. (8*4.767=$38.14).
Shouldn’t it be 8*0.70*4.767=$26.70?
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