Fubuki co december 2010

This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.

Viewing 4 posts - 1 through 4 (of 4 total)

Author

Posts
January 20, 2020 at 8:51 am #559140
rimshy
Member
- Topics: 95
- Replies: 91
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
January 20, 2020 at 2:58 pm #559196
John Moffat
Keymaster
- Topics: 57
- Replies: 54857
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.
January 20, 2020 at 11:19 pm #559346
rimshy
Member
- Topics: 95
- Replies: 91
So i can use any one of them like normal borrowing rate or risk free rate as cost of debt for APV questions
January 21, 2020 at 8:18 am #559353
John Moffat
Keymaster
- Topics: 57
- Replies: 54857
Yes – we use either the normal cost of borrowing or the risk free rate. Using either of the two gets full marks (but always state which one you are using).

Again, I explain the arguments for both in my free lectures.
Author

Posts

Viewing 4 posts - 1 through 4 (of 4 total)

You must be logged in to reply to this topic.