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In a type 11 acquisition using the APV Method. the discount factor to discount tax saved on interest debt is the risk free rate or the cost of debt. Kindly assistance, normally in APV the tax saved on debt interest is discounted using the risk free rate.
Hellen: I am not sure what question you are answering – it is certainly not the question that Sukhdeo asked!!
Sukhdeo: There is an argument both ways regarding this. Basically the tax saved should be discounted at the rate applicable to the level of risk, which is arguably the same risk as that attaching to the debt interest. The question is as to whether it is better to assume risk free or better to use the return on debt (which is due to the riskiness of the debt). The examiner will accept either (even though the answer will be different) provided that you state your assumption.
Some examiners answers to past questions have used the return on debt, and some have used the risk free rate – more commonly the risk free rate so best to use this (but still state the assumption).
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