- This topic has 8 replies, 5 voices, and was last updated 12 years ago by
.
- Posts
1) in APV when calculating PV of tax shield on debt, when to use which rate for discounting? risk free rate or kd????
2) Is the kei (cost of equity of ungeared company from given formula) same as ke calculated through CAPM using asset Beta ??? when to use which one?
1) both can, Rf easier
2) when doing NPV, use Be, then Ke; when doing APV, use Ba (or Bu), then Keu; when doing risk adjusted WACC, degear, regear, CAPM, WACC!Agreed.
Except that for (1), there is debate over whether to discount at the risk free rate or kd. In theory they would both be the same, but in practice (and in exams) they are not the same because debt is never completely risk free.
The answer will be different depending on which rate you use for discounting, and the examiner allows both answers (in some answers the examiner himself uses the risk free rate, and in others he has used Kd).
I personally think that discounting at Kd is better because the risk attaching to the tax shield is the same as the risk attaching to the debt interest itself.
However, as I have written, the examiner allows either.
thanks a lot Sir john and dazhong. one more thing: what about PV of tax shield on SUBSIDISED LOAN…..is it compulsory to discount it on Rf rate, since its offered by govt, or is this also upto our choice…..?
Same will be used…..In calculating financing side effects it is better to use same rate through out the calculation!!
AQ! is correct – you should use the same rate throughout. Either the risk free rate, or Kd.
Debt means “geared”. There is no ungeared cost of debt, only got ungeared cost of equity.
- You must be logged in to reply to this topic.