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Sir may i ask why the calculation for interest saved is not multiply (1-t) ? as i saw question only mentioned issuing cost is non tax deductible.
thank you.I assume that you are referring to workings 6 of the answer.
If so then the tax saving on the interest subsidy has been calculated as being 0.3 time the subsidy benefit. However it needs discounting separately because it is one year in arrears.
When calculating for the present value of Tax shield and subsidy benefit on a loan does one has to add the issue cost of the loan to the amount of loan.
Eg: Issue cost= $2.4m
Amount of loan= $ 50 m
Normal borrowing rate 10% for 4 yrs
Tax @ 30%Answer:
1. PV of Tax Shield =10%*50m*0.30*(3.170-0.909)2. PV if Tax Shield= 10%*(50m+2.4m)*0.30*(3.170-0.909)
Kaplan used the 2nd formula in their study textbook.
In Kaplan AFM textbook, the issue cost was added to the amount to be raised when calculating the Tax Shield on the loan and the Subsidy Benefit but upon solving the past questions I’ve seen they don’t add the issue cost to the amount of loan when solving for the PV of tax shield and subsidy benefit.
Can someone please help me.
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