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hi
in APV tax sheild of cheap loan needs to be calculated as follows right:
interest saved due to cheap loan
[(normal % – cheap loan%) x loan](-) tax lost on the interest saved
into the annuity factor right,
i do not understand the method used in J13 Q1(a)
” PV of the tax shield and subsidy
Annuity factor (7%, 15 years) = 9·108
Annual tax shield benefit interest paid = 3% x $150m x 25% = $1·1m
Subsidy benefit = 4% x $150m x (1 – 25%) = $4·5m
PV of tax shield and subsidy benefit = 5·6 x 9·108 = $51·0m ”i got the answer as $40.986m from the above formula
why are both the answer different?
In general the benefit of the tax shield is the PV of the tax saving on the interest.
If there is a subsidised loan then this is an extra benefit.
So the benefit of the tax shield is 1.1M per year.
The subsidy benefit is 4.5M per year.
So the total benefit is 5.6M per year, which when discount at 7% for 15 years gives a total PV of the benefit of 51MI don’t know from where you are getting 40.986M.
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