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Please help me to explain why the examiner uses rate of 5% as cost of debt. It is assumed and I can use other rate , ei 10% or 2.5% ?
Thank you.
I assume that you are referring to the 5% used when calculating the benefit of the tax shield.
As I explain in my free lectures there are arguments for either using the normal cost of debt or for using the risk free rate (and the examiner always allows either to be used).
The question says that the normal cost of debt is 5% and therefore you can use either 5% or the risk free rate of 2.5%. Using any other rate here would be wrong.
In Sep /Dec ( Zhichi ), the risk free rate is 4.8%, normal borrowing rate is 6%.
But the examiner uses the rate of 3% to calculate the benefit of tax shield.Please help me to explain.
I also do not understand why the information provided ” interest rate of 180 basis point lower that the risk free rate of 4.8%” has not been taken into when calculating benefit of tax shield and tax paid for subsidy benefit.
The information provided in MJ2018 (Tippletine) is the same “interest payable at a rate of 30 basis point below the risk free rate of 2.5%” but it has been taken into in the answer.
Thank you.
The actual interest payable on the subsidised loan is 180 basis points less than 4.8%, so they are paying interest at 3%.
The tax shield has been discounted at the normal cost of borrowing which is 6%, but the examiner has written that you could have used the risk free rate of 4.8% instead, just as I explain in my lectures.
Please help me to explain why in question Sep/Dec 21, debt finance = initial investment + working capital = 70+10
but in question Mar/Jun 18, debt finance = initial investment only = 30.6
Thank youIn question Amberle Dec 2018, interest of bank loan is 8%, interest of subsidiy loan is 3.1%, risk free rate is 4%.
The examiner said that tax shield could be discounted at 3.1% or 8%
Can I use risk free rate 4% for discounting in this case?In Mar/Jun 18 the question specifically says that the debt raised is just for the investment in the facilities.
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