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I truly feel for you. I’ve experienced ‘technical issues’ twice now back to back, once at a centre and once remote session, and the only response was to withdraw the entry and refund the exam entry fee. It was truly frustrating to study for the same exam all over again and face the same issue again. And now I’m terrified of writing cbe’s because this issue can happen again and the only response from the ACCA Team would be to withdraw the entry and book for the next session which not only renders my effort moot but is also causing me to delay my other career plans.
I really do hope they find an alternative than just withdrawing entries. Hope you don’t face the same issue again. 🙂
I get that the tax is delayed for a year but we are calculating the interest amount at the subsidised rate and wouldn’t that mean while calculating the PV of the subsidised loan the tax relief part is not included because we are including only the opportunity benefit of availing the subsidised loan?
This is another worked example I came across.
Here they have considered the tax relief lost while they have calculated the PV of the interest payment at the subsidised rate. I’m a bit confused regarding the tax relief calculation for the PV of the subsidised loan.A plc requires $1 million in debt finance for 5 years.
It has borrowed $700,000 in the form of 10% bonds redeemable in
5 years and the remainder under a government subsidised loan scheme at 6%. The tax rate is 30%. Assume that tax is delayed one year.(a) PV of the tax shields
Although the cheap loan has a cost of 6% it has the same risk as a normal loan, therefore the appropriate discount rate is 10% pa.
Annual tax relief = Total loan × interest rate × tax rate
700,000 × 0.10 × .30 = 21,000 x 3.791 x 0.909 = 72,366
300,000 × 0.06 × .30 =72,366 x 3.791 x 0.909 = 18,609
Annuity factor for 5 years @10% Discount factor for 1 year @10% PV of the tax shield(b) PV of the cheap loan
Annual amount
300,000 × (10% – 6%) = 12,000 × .30 = 12,000 x 3.791 = 45,492
Annuity factor for 5 years Present value factor – PV of the cheap loan
Tax relief lost = 3,600 x 3.791 x 0.909 = (12,406)Total = 124,061
So this is the solution given in the text book. As you can see the interest rate used for calculating the amount of interest is 10% and not 8%. Im arriving at $722,760 but the answer is $951,000.
Solution
(a) Step 2 of the APV would be as follows.
We assume that the loan is for the duration of the project (four years) only. Annual interest = $6 million x 10%
= $600,000
Tax relief = $600,000 x 0.3
= $180,000
This needs to be discounted over Years 1 to 4 at the normal cost of debt of 10%. NPV tax relief = $180,000 x Discount factor Years 1 to 4
= $180,000 x 3.170
= $570,600
However, we also need to take into account the benefits of being able to pay a lower interest
rate.
Benefits = $6 million x (10% – 8%) x 10% discount factor Years 1 to 4
= $6 million x 2% ? 3.170
= $380,400
Total effect = $570,600 + $380,400 = $951,000.
