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Hi Sir
in the Strayer question, when calculating the tax shield, BPP calculates interest on the full amount of new capital to be raised ($816m * .072 in this question)
i thought that the interest should be calculated on the debt portion of the new capital, based on the current capital structure…eg $816 * 25/100 = $204m * .072
or do we alleyways calculate the interest based on the full amount of new capital to be raised for APV questions?
The tax shield only relates to the interest on the debt raised for the project. In Strayer the finance for the project is being raised from debt per the question.
(If it were the case that the existing capital structure was being maintained then we would not need to calculate an APV – we would simply discount at a WACC specific to the project, as I explain in the free lecture.)
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