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Dear Sir,
I am working on the question Intergrand (12/02) in BPP Rev kit. In the solution working 3 for tax shield, it is : Bank loan (Dt) (30*0.25) = 7.5. This Euro 7.5 mil is then added to the CF. I understand 30 is the bank loan balance, 0.25 is the coporate tax rate. Please help to explain what this calculation mean and why.
Thanks,
DinhIt is assumed that the interest on the bank loan is at the risk free rate, and therefore the PV of the interest payments discounted at the risk free rate will equal the loan of 30.0. (Because bank loans are not repaid at a premium).
Therefore the PV of the tax saving on the interest will be equal to the tax saving applied to the PV of the loan itself of 30.0.
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