- Since here we are only provided with kc (I.e. 10%) and not with any other factor (like differential risk premium). Then how can we calculate adjusted discount rate?
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To calculate the adjusted discount rate, you need to consider the tax benefits of debt. In this case, the company is proposing to finance the project with perpetual debt to take advantage of these tax benefits. Here’s how you can calculate the adjusted discount rate:
But answer isn’t matching according to this method. Cost of equity= assets = capital exp = ₹270 L
And market value of debt = 280L
Thus cost of capital = 0.49*14 + 0.51*7 = 10.43% but ans is 8.8%