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I can see in the key, tht in the APV the PV of the financial packace discounted by the cost of debt, but tht is nt indicated tht discounting with risk free rate wld be also accepted. Was it? Because based on the textbook tht is also an option.
If I use company’s normal borrowing rate to discount cash flows I state assumption that it is actual cost. But If using risk free rate, what assumption can we say about it, why we used this rate?
The rate at which we discount that tax benefits should be the rate applicable to the riskiness of those benefits.
If we use the cost of debt, we are assuming that the tax benefits have the same riskiness at the debt.
If we use the risk free rate, we are assuming that the tax benefits have zero risk.
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