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Adjusted Present Value (APV)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Adjusted Present Value (APV)

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • June 13, 2021 at 6:23 pm #625186
    siwela1
    • Topics: 24
    • Replies: 17
    • ☆

    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?

    June 14, 2021 at 6:40 am #625222
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49598
    • ☆☆☆☆☆

    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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