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sir when calculating APV, for discounting the loans(normal and cheap loan) which discount rate should we ideally use? risk-free rate? pre-tax cost of debt? Could you also mention the premise which we should state for making an assumption, and decide to go for either?
You are clearly not watching my free lectures and you cannot expect me to type out here what I explain in my lectures.
We do not discount the loans, we discount the tax saving on the interest.
You can use either rate – the examiner always accepts either. Using the pre-tax cost of debt assumes that the tax saving carries the same level of risk as the debt. Using the risk free rate assumes that the tax saving is risk free.
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