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When discounting tax shield on borrowing and subsidy loan benefits, various rates can be used which include:
1)Normal % of borrowing
2)Risk Free % (as per govt treasury bills)
3)Govt Debt Yield %In Burung, examiner answer used normal borrowing % for discounting, to reflect the default risk of the company.
He stated to explain the assumptions made if one of the other rates are used.
Can you explain what these other assumptions are?
I do explain in my free lectures on APV !!!
The risk attaching to the tax saving can be argued to be risk free, in which case it would be sensible to discount at the risk free rate (and the yield on government securities is as usual the nearest to a risk free rate).
It can also be argued to carry the same risk as the debt interest, in which case it would be sensible to discount at the normal return to investors on the borrowing.
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