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Kevin bought $1m nominal value of unquoted 5% bonds at $500,000.
Bonds are to be redeemed at par in 5 years time.
Kevin estimated return of 30%
tax at 25%
MV = (interest of 5 x 5 yrs annuity factor @30%) + (redemption of 100 x 5 yrs DF@30%)
Why in this case interest is not taking tax into consideration?
It is investors who fix the market value, and they are not affected by company tax.
Tax is only relevant when calculating the cost of debt to the company, because it is the company who gets the benefit of the tax saving.
This is a common question in the exam, and I do stress this in my free lectures on the valuation of securities.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.