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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.It 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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