Removal of Tax from MV of Debt in Asset Beta formula

CClaire8y ago

In the formula for calculating Asset Beta: Why do we remove the tax element from the Market Value of the debt? Isn't the interest portion only that is subject to tax relief?

John MoffatTutor8y ago#1

You are effectively asking me to prove the formula, which I am certainly not going to do because proving it is not in the syllabus! :-) It is because the formula comes from M&M, and (with M&M's assumptions) the present value of the tax savings on the interest will be equal to the market value multiplied by the tax rate.

CClaire8y ago#2

thanks John :) I understand. Just like the mv of the equity is the pv of future dividends, so is the mv of the debt.

John MoffatTutor8y ago#3

Correct :-)

This topic is locked — no new replies.