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Tax shield on Subsidised loan.

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Tax shield on Subsidised loan.

  • This topic has 3 replies, 2 voices, and was last updated 5 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • February 2, 2020 at 7:01 pm #560450
    arjun585
    Participant
    • Topics: 4
    • Replies: 4
    • ☆

    Dear Sir John, I have a question regarding dec-2018 (Q3- Amberle Co.). How to calculate Tax shield on subsidised loan? There is any formula to calculate tax shield on subsidiesd loan. I am getting confuse to calculate it. Please clarify Sir. Thanks

    February 3, 2020 at 8:31 am #560483
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    The benefit of the tax shield is the PV of the tax saving on the interest payments.

    The interest on the subsidised loan is 3.1% x 80M, and therefore the tax saving each year is 30% x (3.1% x 80M).

    The interest is payable for 4 years and there is no delay in tax. Therefore we discount the tax saving using the 4 year annuity factor.

    The interest rate used for discounting can be the risk free rate of 4%, or the normal borrowing rate of 8%, or the subsidised loan rate of 3.1% – depending which rate you use there will be a different answer, but as I explain in my free lectures there are arguments for all of them and the examiner always accepts any of the rates.

    February 3, 2020 at 7:06 pm #560566
    arjun585
    Participant
    • Topics: 4
    • Replies: 4
    • ☆

    Thank you Sir for your explanation, now it’s clear for me.

    February 4, 2020 at 7:50 am #560608
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Tax shield on Subsidised loan.’ is closed to new replies.

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