Page 207 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Cost of capital and capital investment decisions

10.3 Step 2: Present value of financing side effects

 These include the following.

Issue costs

PV of tax relief on interest, discounted at pre-tax cost of debt

PV of post-tax interest savings on subsidized loans

 Note: when calculating the tax relief on interest you should use the increase in
debt capacity of the firm, rather than the actual debt raised.

10.4 Step 3

 APV = 'Base case NPV' + PV of financing 'side-effects'.

 If APV > 0, then accept.

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