Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › APV and ke
- This topic has 8 replies, 5 voices, and was last updated 11 years ago by
John Moffat.
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- November 19, 2012 at 3:28 pm #55483
1) in APV when calculating PV of tax shield on debt, when to use which rate for discounting? risk free rate or kd????
2) Is the kei (cost of equity of ungeared company from given formula) same as ke calculated through CAPM using asset Beta ??? when to use which one?
November 19, 2012 at 4:12 pm #1078881) both can, Rf easier
2) when doing NPV, use Be, then Ke; when doing APV, use Ba (or Bu), then Keu; when doing risk adjusted WACC, degear, regear, CAPM, WACC!November 19, 2012 at 6:48 pm #107889Agreed.
Except that for (1), there is debate over whether to discount at the risk free rate or kd. In theory they would both be the same, but in practice (and in exams) they are not the same because debt is never completely risk free.
The answer will be different depending on which rate you use for discounting, and the examiner allows both answers (in some answers the examiner himself uses the risk free rate, and in others he has used Kd).
I personally think that discounting at Kd is better because the risk attaching to the tax shield is the same as the risk attaching to the debt interest itself.
However, as I have written, the examiner allows either.
November 19, 2012 at 9:02 pm #107890thanks a lot Sir john and dazhong. one more thing: what about PV of tax shield on SUBSIDISED LOAN…..is it compulsory to discount it on Rf rate, since its offered by govt, or is this also upto our choice…..?
November 20, 2012 at 6:12 am #107891Same will be used…..In calculating financing side effects it is better to use same rate through out the calculation!!
November 20, 2012 at 5:01 pm #107892AQ! is correct – you should use the same rate throughout. Either the risk free rate, or Kd.
November 20, 2012 at 11:40 pm #107893Is this ungeared cost of debt?
November 21, 2012 at 12:43 am #107894Debt means “geared”. There is no ungeared cost of debt, only got ungeared cost of equity.
November 21, 2012 at 6:19 pm #107895True! There is certainly no ungeared cost of debt 🙂
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