cost of redeemable debt with tax

rugby009

All

am preparing for CPA, am stuck with one part of calculating cost of redeemable debt with tax.

am fine with arriving at the cash flows (interest, current market rate, tax relief, final redemption value) and arrive at the NPV at two %s

but i am stuck with some examples where interest is in one period but the tax relief for that is taken in the cash flow in the next period.

i can give an example here. debenture with current market value of 98, redeemable at par (100) after 3 years . tax is 40 %

i have given the cash flows in the attachment as they were not getting formatted properly.


in this case why is the tax relief calculated in the next period instead of the same period.

i have seen examples where interest and the tax relief on that are calculated in the same period.

in the example above is it because tax can be paid one year in arrears the cash flows are calculated as above

backtothebooks

Hi Rugby009,

If the tax is payable one year in arrears then the reduction in the tax payable as a result of the interest paid is also one year in arrears. Basically, if we pay the interest this year then we get the tax advantage on the interest payment next year,

I hope this helps

rugby009

thanks backtothe books, that answers my query, thanks again