Sir,
Why discount rate used is ungeared cost of equity . It is written in the question that it intends to raise full amount through debt .
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Fubuki
6y ago#1The answer is calculating the APV (adjusted present value) because there is a big change in the gearing of the company.
For APV calculations, we always calculate the base case NPV by discounting at the ungeared cost of equity, and then adjust for the tax shield on the debt.
I explain this in my free lectures on the impact of financing (the lectures working through and explaining Chapter 12 of our free lecture notes).
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