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Good morning Sir,
In APV, when calculating tax and interest saved, which discount rate should be used? Risk-free rate of interest; cost of debt or interest rate on loan? I have seen all of them in examples. Which one do you suggest to use in the exam.
Thank you for your answer in advance!!!
As I do explain in my free lectures, there are arguments for using either the risk free rate or the return to investors (i.e. the pre-tax cost of debt). The examiner always accepts using either of them (even though obviously the final answer is different). So use whichever you find the easiest – it doesn’t matter 🙂
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