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Hello,
– A company receives a perpetuity of $20,000 per annum in arrears, and pays 30% corporation tax 12 months
after the end of the year to which the cash flows relate.
At a cost of capital of 10%, what is the after tax present value of the perpetuity?
A $140,000
B $145,454
C $144,000
D $127,2741. The answer is B
2.Could you please explain how to calculate the PV of the corporation tax?The PV of the perpetuity before tax is 20,000/0.1 = 200,000.
The PV of the tax outflows is therefore 30% x 200,000 x 1/1.10 (to discount for one extra year because the tax is one year later).
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