Skip to content

ACCA Strategic Professional · Advanced Financial Management · Impact of financing on investment decisions and adjusted present values

Brenn Co raises $4m of perpetual debt to finance a project, but the project's debt capacity is assessed at only $3m. The tax rate is 30%, and the pre-tax cost of debt is used to discount tax shields. Assuming the tax shield is recognised only on debt that the project can sustain, what present value of the tax shield should be included in the APV?

The PV of the tax shield is $900,000. Only the $3m of debt that the project can sustain is counted, and for perpetual debt the PV equals the tax rate of 30% multiplied by $3m. Using the $4m actually raised would overstate the benefit.

  1. A$300,000
  2. B$900,000Correct
  3. C$1,200,000
  4. D$2,100,000

Explanation

Only the debt that the project can support, $3m, generates a tax shield that is recognised. The PV for perpetual debt is 30% × $3m = $900,000. The $1.2m option uses the actual debt raised, ignoring the capacity limit. The $300,000 option counts only the excess debt. The $2.1m option multiplies debt capacity by (1 − tax rate).

Did you get it right without looking?

One question tells you little. A timed set on Impact of financing on investment decisions and adjusted present values shows your real accuracy, how long you take and where you lose marks.

Practise Impact of financing on investment decisions and adjusted present valuesFree diagnostic mock

More Impact of financing on investment decisions and adjusted present values questions