Discount rate for tax shield in APV calculation

You can use either the risk free rate, or Kd to calculate the tax shield - their are arguments for both and the examiner always accepts either (as I explain in my free lecture on this). The reason is that we should discount at the the rate applicable to the riskiness of the tax shield, which is the same as the riskiness of the debt itself. Because we are effectively M&M, then in theory the debt (and therefore the tax shield) should be risk free.