Close Co Dec2011(Q3)

This topic has 1 reply, 2 voices, and was last updated 10 years ago by John Moffat.

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February 22, 2016 at 11:44 pm #301621
Vineeth
Member
- Topics: 32
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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?
February 23, 2016 at 8:17 am #301647
John Moffat
Keymaster
- Topics: 57
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It is the investors who determine the market value, and for them the company tax is not relevant.
Tax is only relevant when calculating the cost of debt to the company.
I do suggest that you watch our free lectures on this.
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