Adjusted present value

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    Hi tutor, I would like to ask regarding the calculation on tax savings on interest while getting the apv. In the question, strayer 6/02 (bpp revision kit), subsidised loan is 4m out to the total 9m, which will cost 2% below the company’s normal cost of long-term debt finance, which is 8%.

    In calculating the tax interest,

    Non-subsidised loan is 5m multiply by 8%= 0.4
    Subsidised loan is 4m multiply by 6%=0.24
    So total interest is 0.64

    My question is, why the percentage of the cost of non-subsidised loan is 8% instead of 2%? Because subsidised loan cost 2% below the company’s normal cost of long term debt finance which is 8%, which means subdised loan cost 6%. So, why non-subsidised loan cost 8%??

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    John Moffat
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    I do not have the BPP Revision Kit and so I cannot be specific.

    However the question as you have typed it does say that the normal cost of long term debt finance is 8% (and the normal cost will be non-subsidised).

    The subsidised loan is 2% lower than the normal cost, so that costs 6%.

    (Surely the non-subsidised loan cannot possible be costing 2% – the subsidised loan has to be cheaper than the non-subsidised loan precisely because there is a subsidy.)

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