[wesleylam]

I’m in doubt why cant we using actual rate (i.e. the actual borrowing rate which is the subsidised 6%) ?

[wesleylam]

Hi Sir,

Maybe I need to enlighten my question as below: -.

A company requires a debt financing of $20m , the company normally borrow at 8% but government subsidize the project loan of 6%. Assuming risk free rate of 4% and that the project to last for 5 years , corporate tax rate at 30%.

Require :-
Calculate the PV of Tax Shield and PV of subsidy …….what is the discounted rate shall i choose ? I’m using DF @ 6%

PV of Tax Shield = 20m x 6% x 30% = 0.36m per year x 4.212 = 1.52m (using DF @ 6%)

PV of Subsidy = 20m x 2% x 70% = 0.28m per year x 4.212 = 1.18m (using DF @ 6%)

[wesleylam]

Sorry for my careless …..anyway thank for your explanation I’m really appreciated.!

[Author]

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