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Sir I am confused on tax effect while calculating market value of debt. My understanding is if they give shareholder’s required return and interest rate, and tax details as well, no need to deduct tax as we are calculating on the basis of shareholder’s required return.
However if question says interest rate, cost of debt % and tax rates then to deduct tax amount from interest and cost of capital. Am I right?
2. A project requires an investment of $ 25000 and is expected to generate a cash inflow of $8000 a year with the first receipt in one years time. The cost of capital is 10% what is the sensitivity to change of the cash inflow each year?
1. For example if the cost of debt is 7% before tax and 5.6% after tax, and the rate of tax is 20%, the market
value of irredeemable debt with a coupon rate of 6% will be:
P = 6/0.07 = 85.71 or
P = 6(1 – 0.20)/0.056 = 85.71
Both formulae produce the same valuation2. What is the period ? How to calculate NPV?
1. From the other reply of the moderator: “Tax is not relevant when calculating the market value – it is irrelevant for investors. It is only relevant when calculating the cost to the company, because they get tax relief on the interest.)”
2. Let’s suppose that the period of project is 5 years and calculate NPV
Yr Cash Frow DF,10% PV
0 Investment (25000) 1 (25000)
1-5 Cash inflow (8000) 3.791 30328NPV=5328
Sensitivity change in cash flow= NPV/PV of variable( cash fow) = 5328/30328 =0.176 or 18%
Can anyone help me with this question?
Q. Land and building in 2004 were $850 and in 2005 were $850. Plant and equipment (net) in 2004 were $1450 and in 2005 were $1350. Inventory in 2004 was $1025 and in 2005 were $1400. Total net assets were $2325 in 2004 and $2575 in 2005. ordinary shares (25 cents) were $750 in 2004 and $750 in 2005. The value of freehold land and building (never valued) has fallen by 25% since purchased due to recession. The replacement cost of plant and equipment is $1500 but it’s current realisable value is $1125. $180 of inventory is obsolete and could only be sold for $10 as scrap. Estimate the value of share using asset based value.i am confused about the dealing with plant and equipment. i want to know how asset based value is taken out.
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