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Hi guys,
I have another question need to ask. That is the discount rate for the APV debt tax shield. For the discount rate, should I use the interest rate of the specific debt the company taking? or I need to use the risk free rate of return to discount tax shield cash flow?
Thanks for taking time on my question!
In theory the two should be the same because debt should be risk free.
In the exam they are usually not the same, and there is an argument for using either (and you get the marks whichever you use).
Best is to use the cost of debt, because this is due to the riskiness of the debt and the tax saving can be assumed to have the same risk as the debt.
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