CA Sahil Singla.. (Service Tax ) (3746 Points)
19 August 2011Can anyone tell me that why we use Pre-tax cost of debt in Discounting PV on Tax Saving on Interest in APV-Capital Budgeting ?
CA Sahil Singla..
(Service Tax )
(3746 Points)
Replied 19 August 2011
plz someone reply...i feel that it's easy one though m not able to comprehend it
Mansi
(CA (Final), B.com)
(939 Points)
Replied 19 August 2011
because it will already deducted from our income and after tht it will provide us credit .
tht s y we take the benefit of pre tax cost of debt in discounted PV while calculating tax saving
CA Sahil Singla..
(Service Tax )
(3746 Points)
Replied 19 August 2011
but u see that we r using after tax cost of Debt for counting tax Benefits on Intt. in case of Leasing vs. Borrowing Decisions ? Then what is the difference here ?
Mansi
(CA (Final), B.com)
(939 Points)
Replied 19 August 2011
but dear in leasing and borrowings we will choose tht project or item which will provide us more benefits and which is less in cost ryt... but in purchasing and Buying of new machine we considered more on extra income , i mean we take those project which will provide higher returns in future .. so this is diffrence , i think so
Vidit Seth
(Practicing CA)
(76 Points)
Replied 19 August 2011
i had a similar query...
if we are having both cost of debt and cost of capital rates......what are the discounting factors we are going to use for
a) leasing (lessee point of view)
b)leasing (lessor point of view
c) borrowing
i got confused bcause of various rates taken in CA Final PRactice manual...
plz help...
CA Sahil Singla..
(Service Tax )
(3746 Points)
Replied 19 August 2011
Mansi
sorry to say ..but not agreed..bcoz saving in cost is equal to receipt of income...that doesn't matter
CA Sahil Singla..
(Service Tax )
(3746 Points)
Replied 19 August 2011
in case of leasing-
After Tax cost of debt both for Lease & borrowing
For Lessor- Cost of Capital since it's a Investment Decision for Lessor
Gopal Suthar
(Chartered Accountant)
(60 Points)
Replied 19 August 2011
dear sahil singla... ,
do you really have any doubt or you want to test the knowledge of others..
CA Deepak Joshi
(TaxTalk)
(178 Points)
Replied 19 August 2011
Hi Sahil,
First i must admit that i m not in total confirmity with what Mansi has to say.... Also Mr. Gopal I would really recommend that if u know the answer then only answer otherwise i don't think its necessary to post such statements.....even if he's not having genuine doubts..... dats my view.....
Regarding the main query...let me try....
See before calculating APV we first find base case NPV...ever thought y we find that???
'coz we are finding NPV assuming all equity company only.
Now we find APV using debt savings PV at pre tax debt rate......a very right ques arises y??
In my views now we are finding the effects of only the debt portion on the compnay's earnings. I m not saying effects of debt and equity put together... In that scenario WACC should hv been used....
though i m not 100 % sure but i think i m nearly there...lets see what others hv to say...
Vidit Seth
(Practicing CA)
(76 Points)
Replied 19 August 2011
hey sahil...thanks for reply..
ur logic seems to be correct , but plz go thru ca final practice manual...it creates confusion
C.A. LINESH PATIL
(CA)
(910 Points)
Replied 20 August 2011
APV technique is used in a country where equity can be shown temporarily as debt.while its equity only.that means we will take tax benefit of interest on that debt which is equity & on which interest is not intended to be paid. in india this can not be happened as deduction of interest on debt is allowed only on payment basis under section 43B.
That means in this case true cost of capital will be cost of equit as the capital is equity not debt. & as we know that cost of equity is always taken pre-tax.there fore for discounting tax saving n all other cash flow,we will take cost of debt ( equity) pre-tax.
Practically in most of country where APV technique operates all the cash inflow including tax benefit on interest is discounted by Ke but ICAI in thier suggested has discounted the tax benefit on interest by pre-tax Kd.
because interest would be for equity which may or may not be paid there fore should be discounted with their expectation that is Ke.
I hope u understood & ur query is resolved.
Thanks & Regards
Mukesh Kumar Singh
(CA-FINAL)
(4094 Points)
Replied 20 August 2011
| Originally posted by : Mansi | ||
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because it will already deducted from our income and after tht it will provide us credit . tht s y we take the benefit of pre tax cost of debt in discounted PV while calculating tax saving |
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