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Sir
this question states that a project will be financed entirely thru a bank loan. he gives the interest rate and the WACC that the co uses.
there is no other info relating to CAPM or Vd and Ve etc.
only the net cashflows are given.
in the answer he uses the interest rate given by the bank for the loan as the discounting rate.
my question: if a project is entirely financed by debt, we use the Kd(1-t) as our discount rate?
thank u in advance
I only have the current edition of the BPP Revision Kit, and it does not contain a question called NRD.
For that reason I cannot really answer most of your question.
However, generally, if a project is financed entirely from debt the we do not simply use Kd(1-t) as the discount rate, for two reasons.
Firstly, raising more debt will increase the cost of equity and therefore the project needs to cover not only the cost of the debt but the extra cost of equity. For that reason we use the APV approach.
Secondly, the cost of debt will only be Kd(1-t) if the debt is irredeemable (if redeemable then it is the IRR of the after tax flows). If it is a bank loan then it is indeed Kd(1-t).
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