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Risk adjusted WACC and adjusted present value

4.4 Step 2: Present value of financing side-effects

 ‘Financing side-effects’ include the following:

Issue costs

Tax relief on interest

Post-tax interest savings on subsidised loans

 Note: When discounting the financing side-effects cash flows, a
discount rate should be used that reflects the risk of those cash
flows. Hence, the risk free rate is often used (or the company’s k d
if the debt finance is not risk free).

Illustrations and further practice

Now try TYU 2 and TYU 3 in Chapter 7

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