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Hello John. It appears that when investors chose to go with the conversation value of a loan note, the interest will not be added net of tax. For example, if it is a 9% loan note with 135 redemption value and 30% tax, it will be 9+135 discounted at the rate of return. Instead of 9(0.70) + 135. Am I correct and if yes, why is this so?
It is investors who determine market values, and they are not affected by company tax. Company tax is never relevant when calculating the market values – it is only relevant when calculating the cost of debt to the company.
I stress this point in my lectures on the valuation of securities, because it is almost always relevant in at least one question in the exam.
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