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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
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.
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