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Hello Sir , in Calculating APV we need the Ungeared Cost of Equity
ke = kei + (1 – t) (kei – kd) Vd/Ve
10·5% = kei + (1 – 0·3) (kei – 5·4%) (240·8/400)
I understand upto that but get confused now in the mathematical point of view how are we going to derive the answer after that .
10.5%=Kei+0.7(kei-5.4%)(0.602)
Sir another Question is that why we are using the annuity factor of year 2-5 all we need is year1to 4 annuity factor i guess thats to do with the 1 year delay of tax payment
For your first question, you need to rearrange the equation using basic algebra, as follows:
10.5 = Kei + (0.7 x Kei x 0.602) – (0.7 x 5.4 x 0.602)
10.5 = Kei + 0.4214Kei – 2.27556
Add 2.27556 to both sides:
12.77556 = 1.4214Kei
Kei = 12.77556 / 1.4214 = 8.998
Sir why is the Subsidy benefit like this
Benefit = $30,600,000 x (0·05 – 0·022) x 3·546 = $3,038,000
it should be like this 30,600,000*0.3%*3.546=$325522.8
as a matter of fact, would it be acceptable if it was like this as below?
$30,600,000×0.3%=91800
but we will forgone tax savings so 91800*0.30=(27,540)
Total 64,260
A.F5% 3.377=217006
I guess in my workings i have done it in a combined approach and then mutlplied with aan annuity factor while in the model answer they have first done subsidy benefit seperatly and multiplied by A.F and then they have done tax relief lost and multiplied it seperatly and then combined it
The subsidy benefit is not 0.3%. It is the difference between the normal cost of borrowing of 5% and the subsidised rate of 2.5 – 0.3 = 2.2%.
Otherwise what you have written is OK.
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