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Please explain the ‘tax shield ‘ and ‘subsidy benefit ‘ calculation and relevant assumptions. I’m stuck,even after watching the lecture.
I don’t know which lecture you have watched, but they are explained in the lectures.
You will know that Modigliani and Miller say that without tax it makes no difference how finance is raised, but that with tax raising debt becomes attractive because they save tax on the interest payments which makes the cost of the debt finance lower.
The adjust present value approach uses this, and first calculates the NPV as though the project was all equity financed. If there was no tax, this would be the NPV however it was financed. Because there is tax you then add on the benefit of the tax relief on the debt interest (and the benefit of any subsidies).
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