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Evaluating a Capital Project with Debt Financing and an Interest Rate Swap: An APV Approach
My friend had got this question in Sept 2023 morning session, he found this question very confusing, he doesn’t remember the question
Can you tell question I can practice for this type? Any similar question with effect of interest swap in apv
Thank you!
I do not remember there having been a previous question with both APV and an interest rate swap.
However for the base case NPV any interest rate swap would be irrelevant (because we discount the cash flows at the ungeared cost of equity). The relevance of the interest rate swap would only be in calculating the tax saving on debt raised, which without seeing the question your friend refers to would be calculated using the cost of debt after swapping.
Even if it was all presented as being one question, there would be two separate sets of workings (one for the interest rate swap and one for the APV), both of which have been examined separately lots of times in the past (and obviously each of the two parts would be marked separately).
Eben I didn’t understand what my friend meant but I have gone through lot of afm discussion groups and this wat I found
Q1
APV
Need to calculate bank loan which have interest rate swap i.e find the best interest rate, look for PV tax saved on interesAre you also referring to the same one sir?
In detail (found from afm forum opentuition)
Question number one was an APV calculation for 21 points with a possible interest SWAP and comments on managers view. I got a 12% cost of equity, negative NPV and positive APV after incorporation of subsidised loan finance and tax saving on normal loan interest. At the same time I feel i was not consistent enough – i calculated saving on subs loan versus rate on notmal loan, which was given as 6%, but at the same time SWAP resulted in a decrease of rate to 5.7% and I have caluclated tax saving on interest 5.7%, not 6%.. pehaps subs loan saving should have been calculated as well versus the updated rate (but in this case it would make no sense to discount it at 6%). At the same tine in requirement there was not separate question regarding the rates SWAP which is strange.
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