Sfm leasing doubt

it must be tax advantage on interest on debt and not interest on debt.

INTEREST ARE ALWAYS DEDUCTED TO FIND NET CASHINFLOW. TO FIND PV OF CASHINFLOW WE HAVE TO CONSIDER RATE OF COST OF FUNDS APPLICABLE TO THE COMPANY. SAY RATE OF INTEREST TO COMPANY IS 10% BUT SINCE INTEREST IS TAX DEDUCTIBLE , THE NET COST OF FUND TO THE COMPANY IS 10 - 3 (TAX @ 30%) = 7%. SO CASHINFLOW ARE DISCOUNTED AT 7% AND NOT AT 10%. 

FURTHER WE ALWAYS TAKE WACC TO COMPANY (COST OF EQUITY + COST OF DEBT) FOR DISCOUNT PURPOSE.

           COST OF EQUITY     WEIGHT

                     12%                   40%

                      7%                    60%

WACC = 12% X 0.4 + 7% X 0.6= 9%

RATE OF DISCOUNT = 9%

INTEREST ARE ALWAYS DEDUCTED TO FIND NET CASHINFLOW. TO FIND PV OF CASHINFLOW WE HAVE TO CONSIDER RATE OF COST OF FUNDS APPLICABLE TO THE COMPANY. SAY RATE OF INTEREST TO COMPANY IS 10% BUT SINCE INTEREST IS TAX DEDUCTIBLE , THE NET COST OF FUND TO THE COMPANY IS 10 - 3 (TAX @ 30%) = 7%. SO CASHINFLOW ARE DISCOUNTED AT 7% AND NOT AT 10%. 

FURTHER WE ALWAYS TAKE WACC TO COMPANY (COST OF EQUITY + COST OF DEBT) FOR DISCOUNT PURPOSE.                               COST            WEIGHT      

EQUITY               12%                   40%                      

DEBT                    7%                    60%

WACC = 12% X 0.4 + 7% X 0.6

               = 9%

RATE OF DISCOUNT = 9%

 

Thanks for the clarifications 

If you refer RTP Nov 2015,similar kind of adjustment is there.In that problem they took after tax cost of debt and ignored tax savings on interest.But in  PM Q8,it is the other way.

These are the cases where we get confused about what is correct and what is not.Simply do in both possible ways in exam by referring to a note.

Thanks sandeep