[lfosky]

Hi Sir,

I have a question on calculation of tax shield and financial effect of subsidized loan in Burung Co June 2014 which I would like to ask for your help as well.

In the answer to the exam question, tax shield is calculated as tax saving arise from actual interest payment
PV of Tax Shield = [($42,970,000 x 60% x 0·015 x 20%) + ($42,970,000 x 40% x 0·04 x 20%)] x 3.63

I understand that if tax shield has been calculated based on actual interest payment (which based on the subsidize interest rate already) => the calculation of subsidy benefit should not net of tax (as this has been accounted for in Tax shield calculation). However, in the answer, the calculation of Subsidy benefit is:

PV of Subsidy benefit = $42,970,000 x 60% x 0·025 x 80% x 3.63

Could you help to explain which way is correct to calculate the tax shield and subsidy benefit?

Thank a lot!

[Author]

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