Dear John,
In(ii), Bahari project
When calculating the PV of tax saving and subsidy, it uses the 7% for discounting. Why not 3%, which is the cost of the subsidy debt?
Thank you
Ask the Tutor ACCA AFM
June 2013 Q1
Or can it use 4%, the risk free rate of return?
10y ago#2The PV of the tax savings can either be calculated at the actual cost of debt (before any subsidy), so 7% in this case, or at the risk free rate of, in this case, 4%.
There are arguments for both and the examiner always gives full marks for either (even though obviously the final answer will be different).
Just make sure (as always) that you set out your workings clearly so that is obvious to the market what you have done.
Ok, get it. It's the rule. Thank you, sir.
10y ago#4You are welcome :-)
Sign into reply to this topic.