for apv calculation, when government gives us subsidy loan, we have to discount the tax shield on the loan to present value. what rate should we use to discount it? risk free rate or pre tax cost of debt?
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12y ago#1There are arguments for using either of them. (In theory, debt should be risk free and so the two would be the same, but in practice (and in exams) they are not the same).
The examiner usually uses the risk free rate, but always allows you to use either (even though the final answer will be different). Usually he actually says that in his answers, but he always allows either to be used.
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