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1. In PV of free cash flow in Combined company equity value, i would like to ask how come we do not take into account of tax ???
if im not wrong, we always take into account tax after free cashflow but however how come tax calculation is missing in part (a) ????
2. also isn’t 20% tax rate for both cost of debt and cash flow ?
if not, how do we know which tax rate are for cost of debt and cashflow ??
1. The free cash flows given in the question must be already after-tax – free cash flows are always after tax!!
2. Your question makes no sense. The reason for using tax when calculating the cost of debt is that debt interest is allowable for tax – the rate has to be the same as that that applies to the profits!!!
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