Hi everyone,
Just to ask some questions regarding APV:
1- In KAPLAN study text Illustration it shows the below format:
Base Case NPV = xxx PV of Issue Costs: Debt: = (xxx) Equity: = (xxx) PV of Tax Shield: Normal Loan: = xxx Cheap Loan: = xxx PV of Cheap Loan: Interest Saved: = xxx Tax relief lost: = (xxx)
Adjusted Present Value = X/(X)
Now my question, If you have performed TYU 3 in KAPLAN study text, they didn't take the (Tax relief Lost) item in their workings.
Can anyone tell me Why ??
I assume you are talking about the subsidy? If yes, you will see that they have taken the lost tax relief into account.
In part iv of the answer, they first calculate the interest saved on the subsidy and then multiply that by 70% (1-T) before calculating the present value. Multiplying by 70% reduces the benefit of the subsidy by the value of the tax relief lost.
Hope this makes sense.
