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Hi Gromit
Please assist on question 5. What is the Base Case NPV? Please see my workings and advise where I went wrong
1.Base NPV $130m
2. (a) Interest on Tax shield = Tax rate x Pre tax borrowing rate x Debt
= 0.25 x 0.05 x $200
=$2.5
2.(b) PV of tax shield = Interest Tax Shield / Pre tax borrowing
=$2.5/0.05
=$50
3.APV = Base case NPV + PV of tax shield
= $130+$50
=$180Annual interest is 200 x 7% = 14
Tax relief on this is 14 x 25% = 3.5 paDiscount at risk free rate of 5% in perp = 3.5/0.05 = 70
APV = 130 + 70 = 200
The source of the benefit arising from borrowing is the tax relief on the actual interest.
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