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Hello!
When computing each of the present values, can we use the risk free rate as a discount factor as opposed to the examiner’s normal cost of borrowing?
I’ve seen in your notes that we can, but in my opinion it gives a big difference in answers for both approaches.
Thank you.
Yes you can.
The examiners answer specifically writes:
Note to markers:
Full credit should be given if tax shield is discounted at the government interest rate of 3·1% rather than the normal borrowing rate of 8%.
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