Conejo qs Sept Dec 2017

Always, however any borrowing is repaid, the present value of the repayments (including interest) will equal the amount borrowed. If the repayments (interest + capital) are of an equal amount each year, then the PV is the repayment x the annuity factor. So the amount of the repayment each each year is equal to the amount of the borrowing / the annuity factor.

I have a similar question. Let's say loan a 5 year loan is 5,000 at interest of 5% and tax is 20 The tax shied is 5000 x 0.05 x 0.20 My question is shouldn't this answer be be multiplied by 5 years before being discounted at a 5 year annuity? Since the interest saving occurs yearly? Please clarify Or my understanding is wrong

I don't understand why this is similar - I am assuming you are referring here to APV calculations :-) The tax saving is 5000 x 0.05 x 0.20 = 50 per year. We need the PV of the tax shield, and therefore there is a tax saving of 50 per year for 5 years - i.e. an annuity of 50 per year for 5 years. To get the PV we multiply 50 by the 5 year annuity factor at either the risk free rate, or the yield to debt lenders (the examiner always accepts discounting at either rate, for the reasons I explain in my lectures).

Ha... I obviously needed an F9 refresher.. thanks

You are welcome :-)