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11. According to the Adjusted Present Value-method, tax shields on interest have to be valued separately. One could either use the unlevered cost of capital
11. According to the Adjusted Present Value-method, tax shields on interest have to be valued separately. One could either use the unlevered cost of capital or alternatively the cost of debt as a discount rate for valuing the tax shields on interest. Under what conditions is the unlevered cost of capital used and under what conditions is the cost of debt used as a discount rate for valuing tax shields on interest? Cost of debt: If the ROCB is proportional to the tax rate. Unlevered cost of capital: If the WACC is proportional to the tax rate. Cost of debt: If future debt is independent from the firm value or if future debt ratios are uncertain. Unlevered cost of capital: If future debt is a predetermined proportion of firm value. Cost of debt: If the EVA is negative. Unlevered cost of capital: If the EVA is positive. Unlevered cost of capital: If future debt is independent from the firm value or if future debt ratios are uncertain. Cost of debt: If future debt is a predetermined proportion of firm value
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