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Please tell how to calulate the cost of debt for calculating present value of tax savings from issue cost ….how i calculated is ( 80%×5.5%)+(7.5×20%)= 6% but they have used 4.5% and also told that 7.5% can also be used
For APV calculations the tax saving is discounted either at the risk-free rate (which is given in the question (government debt) as 4.5% or at the cost of debt which is 7.5%.
The examiner always accepts using either of the two rates, because there are arguments for both.I do explain this in my free lectures on APV.
So i can use any one of them like normal borrowing rate or risk free rate as cost of debt for APV questions
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