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1.to find pv of tax shield ,we can use risk free rate or cost of debt right? is this option to choose imply for both the normal and subsidised loan?or just subsidised loan.?
2.to find annual equal payments what annuity factor do we use? is there an option like we can use cost of debt of normal loan or subisidised loan?(i found this in tutorial note of kaplan kit.)
ok wait i thot when discounting subsidised loan we can use rf rate or cost of debt for subsidiary but now i came across a question where it used cost of debt of normal loan for discounting subsidised loan.
so no matter what type of loan it is (normal or subsidised) i can use cost of debt of subsidised loan or cost of debt of normal loan or risk free rate. Am i correct?
can i use different rates to discount for normal loan and subidised loan?or does it need to b same ?
1. The discounting of the tax shield should strictly be done either at the risk free rate or at the return on the debt (i.e. the cost of the debt before tax). I do explain the logic behind each in my free lectures.
2. In the case where a loan is being repaid in equal annual instalments (covering the principal and the interest), then to find the amount of each instalment we divide by the annuity factor for the interest rate on the loan.
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