Hi John,
I have a question about the calculation of financing impact.
1. For example: the issue cost is 2% of gross finance required ($100), tax rate = 20%, interest rate 5%
The annual tax shied on interest = $100*5%*20% or ($100-$2)*5%*20%?
2. Refer to the past question of Dec 2010, the debt capacity available to the company is equivalent to the actual amount of debt finance raised for the project.
It means we should use the net amount of debt finance ($98) for the calculation?
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APV - Financing Impact
10y ago#1For (1), on that wording the tax shield will be the second of your two alternatives.
However if 100 is needed for the investment then it would be 100 x 102/100 x 5% x the tax rate,
That means the interest tax shield is based on the total amount of debt raised (investment amount + issue cost)?
10y ago#3Correct :-)
Hi john, when debt capacity increases as a result of the project being undertaken, does it affect subsidy? For eg, for a project of 5yrs, a loan of $800,000 with interest rate of 6%(subsidized rate) increased debt capacity of $1,000,000, normal borrowing rate of 8%, tax rate 30%.
Would after tax subsidy be on the theoretical loan of $800,000 or on the increased debt capacity of $1,000,000? Thank you.
10y ago#5No - the subsidy will only be on the actual loan.
Hi John,
The Question 2014 Jun Q2:
The Annual tax relief = 42,970 x Interest Rate x Tax Rate, but the 42,970 is not equal to Investment Amount + Issue Cost.
Hi John,
i got the answer from the topic Neptune 06/08 APV.
The calculation of annual tax relief is based what we make the assumptions on the debt investment. Right?
10y ago#8Yes - that is correct :-)
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