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Hi Sir,
May i know what is the Discounted Rate shall be used from Annuity Table when come to compute PV of subsidy ? for example , Subsidy Interest Rate, Risk Free Rate or Normal Borrowing Rate ?
The amount of the subsidy. i.e. the difference between the subsidised interest rate and the normal interest rate.
Hi Sir,
Maybe I need to enlighten my question as below: -.
A company requires a debt financing of $20m , the company normally borrow at 8% but government subsidize the project loan of 6%. Assuming risk free rate of 4% and that the project to last for 5 years , corporate tax rate at 30%.
Require :-
Calculate the PV of Tax Shield and PV of subsidy …….what is the discounted rate shall i choose ? I’m using DF @ 6%PV of Tax Shield = 20m x 6% x 30% = 0.36m per year x 4.212 = 1.52m (using DF @ 6%)
PV of Subsidy = 20m x 2% x 70% = 0.28m per year x 4.212 = 1.18m (using DF @ 6%)
They should all be discounted at either the normal cost of borrowing (i.e. 8%) or at the risk free rate (i.e. 4%).
There are arguments for both rates (as I explain in my free lectures) and the examiner always accepts either (even though obviously the answers will be different).
I’m in doubt why cant we using actual rate (i.e. the actual borrowing rate which is the subsidised 6%) ?
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