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Hey John!!
Say we issue bonds with a 10 year maturity to finance a project that will last 5 years. When calculating the tax shield, for how many years do I find it for?
5 or 10 years?
and what if it is the other way round? a debt of 5 years for a project lasting 10 years?
What about debt capacity? how long will the debt capacity last?
There is no right answer to this because there are arguments for both. (In fact, since it is based on M&M you could validly assume that the increased debt capacity was in perpetuity).
As always for Paper P4, if you state your assumption and your workings are clear for the marker, and fit in with your assumption, then you will get the marks.
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