Hi, I wonder if I can ask question regarding speciman exam. In problem 2, at the end of part a) there is examiner's note in the answers: "In calculating the present values of the tax shield and subsidy benefits, the annuity factor used is based on 4% to
reflect the normal borrowing/default risk of the company". So where did 4% come from? I can see it is just inflation rate in the question.
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AFM speciman exam problem 2
6y ago#1It is the normal borrowing rate of the company.
Note (v) of the question says that the normal borrowing rate is 1.5% (150 basis points) more than the government yield rate. Under 'further financial information' it says that the government yield rate is 2.5%.
1.5 + 2.5 = 4%
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