In calculating the pv of tax shield in APV.
they find the tax relief and then multiply with annuity factor and then discount it again.
when it is multiplied with annuity factor, it is already discounted and then again discounting it with same discount factor looks weird.
Why is it done so?
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calculating the pv of tax shield
9y ago#1The tax shield is not discounted twice.
The tax benefit is the tax saving on the interest each year. So, for example, if the debt is redeemable in 10 years time then there will be a tax saving on the interest each year for 10 years and so to get the PV you multiply by the 10 year annuity factor.
If you think a particular question has done differently, then say which question and I will explain.
I am using kaplan study text. They do it when tax payment is delayed one year. only for such case, they do discounting two times. I just noticed the difference now.
9y ago#3That does now make sense :-)
The 10 year annuity because there are 10 years of interest, and then 1 years discounting because the annuity starts 1 year late.
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