I have to ask that in apv financing side we substracting issue costs ..we add tax shield ( the present value. Of it) ..and subsidy I have a bit confusion !
Suppose I m normally borrowing at 8 %
But cheap loan is 6%
Loan amount suppose is 60 m
So now I have saved interest of 2% due to paying less on subsidyso this 2% *(1-t) * 60 m ..and if t rate is 30%
So it will be 84.....I take it's present value ..but how should I treat this apv ...I think it should be substracting ?? But y ....and if not then also why ??
Also on subsidy I also have tax shield because I m paying 6% and it is subject to tax saving so 6% (30%)= 0.018 ....taking it's pv at risk free rate or cost of debt ( isn't this cost of debt is pre tax ?? Am I correct??)
And the present valvue of tax shield should be added to base case npv ?
But what about interest saved ?my problem above?
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Apv ( summary)
8y ago#1There are two savings - the saving on the interest and the saving because of the tax shield.
You can show this in several ways (with the final answer being the same).
The easiest is to show the saving on the tax shield on the full interest, and then show the saving on the subsidy net of tax.
And yes, you are correct - you can either calculate the saving on the tax shield at the risk free rate or at the pre-tax cost of debt.
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