• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

APV and the discount rate of the tax shield

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › APV and the discount rate of the tax shield

  • This topic has 4 replies, 3 voices, and was last updated 7 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • November 26, 2010 at 12:40 pm #46273
    mmia
    Member
    • Topics: 2
    • Replies: 2
    • ☆

    My question refers to example 16 of the BPP practice and revision kit

    I have difficulties in understanding discounting the tax relief in the APV calculations.

    p. 144 of the study text tells me to discount the PV of tax relief use either the risk free rate or the cost of debt.
    p. 52 the cost of debt capital is the after-tax cost of raising debt in the capital markets.

    To discount tax relief on redeemable debt in example 16 the risk free rate is used as per the solution.

    I used the after-tax cost of debt and calculated it as
    Year 0 amount of debt raised less issue costs
    Year 0-6 interest on debt
    Year 6 amount of debt to be paid back

    I used IRR to get to the pre-tax cost of debt.

    Would my way of calculating the disount rate for tax relief be right too?

    In the exam how do I know what rate to use? Can I always use the risk free rate referring to the modigliani Miller Model and a debt risk of beta = 0?

    I am quite desperate, as I fear that there is something very important that I missed to understand.

    Another issue on the exam and knowing whether to use APV or NPV: Will the examiner usually tell me to use APV instead of NPV?
    My rule is that if a project or an acquisition affects the exposure to financial risk than use APV.
    If the examiner does not tell me to use the APV I would use it any time the example states that the overall risk to investors in the company changes due to the project. Does this approach make sense?

    Thank you for your help!

    November 28, 2010 at 7:21 am #71744
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Regarding the first part of your question, you are correct. You can either use the risk free rate, or the cost of debt. In theory they should both be the same, but in practice not (because debt in real life is not completely risk free). You will get full marks for using either.

    I would expect the examiner usually to tell you whether he wants APV or NPV. If he does not then your rule is fine.

    February 9, 2018 at 11:41 am #436094
    Lilit
    Participant
    • Topics: 34
    • Replies: 62
    • ☆☆

    Sir, so as I understand we use risk free rate for normal loan as well ?

    February 9, 2018 at 11:57 am #436100
    Lilit
    Participant
    • Topics: 34
    • Replies: 62
    • ☆☆

    Sir one more question, if not told in the question that issue costs on debt are tax deductable, should we assume it is so? I am asking because in Kaplan Q34 not tax releif on issue cost is taken into account.

    February 9, 2018 at 5:30 pm #436133
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    If you are not told, then it is up to you to make an assumption and to state your assumption.

    For nearly all of the P4 questions, there is no one correct answer – it depends on your assumptions (just as it does in ‘real life’ 🙂 ). Provided that you state your assumption you will still get the marks, even if your assumptions is different from that in the examiners answer.

  • Author
    Posts
Viewing 5 posts - 1 through 5 (of 5 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • julio99 on Impairments – Impairment (CGU) – ACCA Financial Reporting (FR)
  • effy.sithole@gmail.com on EPS – diluted EPS Example – ACCA Financial Reporting (FR)
  • Ken Garrett on The Finance Function in the Digital Age – CIMA E1
  • DeborahProspect on ACCA SBR Specimen Exam 2 Question 1
  • darshan.69 on Chapter 9 Pension Schemes TX-UK FA2023

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in