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Hello Tutor
In the calculation below for annual tax relief and subsidy i don’t understand how or where they got the 3.588 value and also for the subsidy where they got 0.02
Annual tax relief = (14,488 × 80% × 0.055 × 25%)
+ (14,488 × 20% × 0.075 × 25%)
= 159.4 + 54.3 = 213.7
213.7 × 3.588 = 766Subsidy benefit
14,488 × 80% × 0.02 × 75% × 3.588 = 624
Total benefit of financing side effects 786
Adjusted present value (708 + 786) 1,494Thank you
3.588 is the annuity factor for 4 years at 4.5%. Since the tables do not give the factor for 4.5% you need to calculate it yourself using the formula given at the top of the tables.
As far as the 2% is concerned, the question says that the subsidy rate will be 200 basis points less than the normal borrowing rate. 200 basis points is 2%.
Sir can we also use 3.350 as the annuity factor for 4 years at 7.5%( the company’s current borrowing rate) for both the computation of PV tax savings from loan interest and Subsidiy benefit? If so, what assumption that I should state.
Pls advise.Yes you could (and the examiners answer states that you could).
The assumption to state is the same as that written by the examiner, i.e. that 7,5% reflects the normal borrowing risk of the company.
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