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Impact of financing video lecture

This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.

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August 26, 2018 at 4:34 pm #469532
jihun lee
Member
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Hi john i have just seen your video lecture on impact of financing 1 and 2
However those two videos still do not explain the reason for using risk free rate or pre tax cost of debt as an annuity factor for the interest saved on subsidy loan and present value of interest
After i have seen the number 2, only time that you have stopped to calculate or explain the annuity factor are 6:00, 14:11 and 23:36
In 14:11, you merely said that we use risk free rate for the annuity factor and didnt explain the reason behind it
August 27, 2018 at 8:34 am #469594
John Moffat
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Yes I do explain!
The logic for using risk free is assuming that there is no risk attached to the tax saving. The logic of using the pre-tax cost of debt is that the saving carries the same risk as the debt interest.
The examiner always accepts using either.
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