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In calculating the financial side effects…
1) For subsidised loan why did they use annuity factor btn year 2to 5… instead of annuity factor for y4
2)why for subsidised benefit they didn’t multiple by (1-30%)or 70% n they used annuity factor of y4
3) what did they find the tax relief loss on I didn’t get it…
4) they didn’t do any calculation for Normal borrowing that was in form of convertible loan note how do we calculate it for this qn….
Plz explain the 4 things an confused of
1. The answer has used the 4 year annuity factor for the subsidised loan interest. The annuity factor for 2-5 has been used for the tax relief because the tax has a one year delay.
2. Because the benefit and the tax saving lost have been dealt with separately (as per (1))
3. They have calculated the tax saving on the whole borrowing and then separately taken account of the tax relief they are not getting because of paying less interest on the subsidised loan.
4. They have two choices – either a subsidised loan or convertible loan notes. They are not doing both. Part (a) of the question asks for the APV on the basis they use the subsidised loan.
(Using convertible loan notes instead is only relevant for part (b) which is just discussion and does not ask for calculations.)
I still didn’t understand part 2 &3 coz subsidised benefit is usually post tax right either (1-30% )or 70%…
Part 1 &4 understood thanks
The end result of the benefit is indeed after tax. The answer has dealt with the two separately – the benefit of there being lower interest and the tax not saved due to there being lower interest.
They had to be dealt with separately (rather than just taking 70% of the benefit) because the tax is one year later than the interest.