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Sir, are we only calculating tax shield on the subsidised loan and not on convertible loan notes because the latter is sort of an equity?
Not at all (and convertible loan notes are not a sort of equity!).
Part (a) of the question asks for the APV assuming that the investment is financed by the subsidised loan. If they choose to finance by the subsidised loan then they will not be issuing convertible loan notes.
Hi John
Sorry if obvious but I’m getting confused with why there is a separate tax relief lost calculation for the apv bit of Tippletine Co. when I look at other exam questions, they’ve only calculated the tax shield and subsidy benefit. And also when calculating the subsidy benefit Ive usually seen it as net of tax but they don’t do that in this question.
Appreciate any guidance in advance!
I forgot to add, I hope we still get marks in case we do the subsidy benefit net of tax? In case we forget to do the tax relief lost? Just not sure when to use it.
Thank you!
You can the same answer by either showing the tax benefit separately or by showing the subsidy benefit net of the tax benefit. It doesn’t matter how you show it.
If you look at the marking scheme (on the final page of the examiners answer) you will see that this part does not carry so many marks and so if you make a mistake it will only lose you 1 or 2 marks.
Thanks John. I tried calculating the subsidy benefit net of tax but the figure I got was slightly different to what the answer says if you did the benefit and tax relief loss bit separately. I wasn’t sure if that was more because of rounding.
In any case like you said I guess if you make a mistake you only lose a few marks. I feel more comfortable with the net of tax option.
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