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Dear Sir, I have a question related to valuation of debt. Should we deduct a tax from interest payments?
I got this question because there is a task where the market value of 9% convertible bonds is needed to be calculated. The rate of corporation tax of 30% is given. Holders require a 10% return. The tax is not deducted from interest, which is to be received, in the answer to the task. But I don’t understand why. It is not specified whether the required return is before-tax or after-tax.You really should watch my free lectures, because I stress this in the lectures and it is commonly asked in the exam!!!
It is investors who determine the market values, and they are not affected by company tax. We discount the full interest without subtracting tax.
Tax is only relevant when calculating the cost of debt to the company because it is the company who received the tax relied.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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