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Sir as we can use both the normal cost of borrowing and risk free rate for calculating the present values, but the examiner will only award marks for using risk free rate depending on the assumption made.
Sir what assumption are we supposed to write. why there is no assumption needed when normal cost of borrowing is used and assumption?
It is not true that the examiner will only award marks depending on the assumption made.
You get full marks for discounting the tax shield at either the risk free rate or at the normal borrowing rate.
If the question asks you to state your assumptions, then obviously one of them is to explain why you used the rate that you did. I explain the logic of each of them in my free lectures.
Sir the qs Burung does ask for the assumptions but there is no assumption in relation to the rate used.
Sir can you briefly explain the logic if that is possible. I did watch your free lectures but I think I accidentally skipped this part.
Thankyou so much.
I would have written the assumption 🙂
The rate should reflect the risk of the tax saving. Using the risk free rate assumes that it is risk free. Using the cost of debt assumes it carries the same level of risk as the debt interest.
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