Adjusted present value

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  • #17094 Reply
    Markus David
    Participant

    Why was 4% used as discount rate to compute the pv of financing?

    #19782 Reply
    Anonymous
    Inactive

    In solving APV questions (Pv of financing side effects), the appropriate rate to use is either the cost of debt or the risk free rate. In relation to this question the cost of debt is actually risk free therefore 4% is the appropriate rate to be used.
    I stand to be corrected.

    #20013 Reply
    joshua joshua
    Keymaster

    Answer: in APV you use the risk free rate to determine the cost of equity of a geared company. So in the question the risk free rate is 4%.

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